Greece is once again causing financial markets a degree of consternation. The failure of the Greek parliament to elect a new President has resulted in the calling of a snap election scheduled for January 25th. This has once again triggered concerns about the possibility Greece exiting the euro zone.
2014 saw relative financial market calm
towards the euro zone. That’s not to say
there was nothing to worry about but market concern about weak output growth
and low inflation was soothed to a significant degree by the pledge by the European
Central Bank (ECB) to expand its balance sheet.
That relative calm largely ignored the growing
unease, discomfort and possibly even rage against austerity that has seen the
rise of anti-austerity and anti-Europe political movements across the euro zone
in recent times. For that reason 2015
was already shaping up to be an interesting year politically in the euro zone,
even without an early election in Greece.
Elections are scheduled in Spain and Portugal for later this year. It only seemed a matter of time before
markets started to worry the far-left Podermas party in Spain is vying for the
lead in political polls.
In Greece the (also) far-left Syriza party is
ahead in the polls and seems odds-on to form the next Government, although it
appears they will likely require coalition support from the centrist Potami
and/or the centre-left Pasok.
During the previous election campaign in 2012
it was the (still) leader of Syriza, Alexis Tsipras, who promised to “tear up”
the bailout agreement between Greece and the troika of the ECB, the International
Monetary Fund (IMF) and the European Commission, an act that would have
resulted in Greece exiting the currency union.
It was arguably that risk within an electorate that, despite austerity, preferred
to stay in the euro zone that saw the current government led by New Democracy
Since then economic growth has turned
positive (off a low base!) but the unemployment rate remains worrisomely high at
25.7%. At the same time austerity
measures have included cuts to pensions, reduced unemployment benefit
entitlements and healthcare services and new levies on property investment.
In this election voters face a choice of more
of the same or a change to a Government led by parties promising softer bailout
terms, debt cancellation and the restoration of social benefits. Syriza is promising higher pensions, free
electricity for poor households, subsidised housing and free medicine and hospital
care for the unemployed. This is to be
paid for by reduced “wasteful” spending and crackdown on tax evasion. They are also
promising a near 50% increase in the minimum wage. That must sound good to an electorate
suffering austerity fatigue and where one in four is out of work.
There are, however, a number of risks for a
new Government to manage. The first is
that 80% of Greek debt is held by official creditors. Add to that the fact the government faces a financing
requirement of €24 billion in 2015. In
the absence of an ability to secure that financing from global markets, the Government
will remain dependent on those same creditors for that funding. Default remains an option but that will
result in exit from the currency union – a result that, despite austerity, is
still not desired by the Greek electorate.
Should exit occur the Euro zone is arguably
better placed to cope with it now than it was in 2012, although that won’t stop
markets from fretting. The European
Stability Mechanism is stronger, the OMT (Outright Monetary Transactions) is in
place, assuming the European Court of Justice doesn’t rule it illegal, and baby
steps have taken towards banking union.
The likely post-election result seems to me
to be the troika remains in charge and that some compromise will result. Continued commitment to macro-economic reform
and lower new spending than currently being promised will be exchanged for some
debt relief in the form of a lengthening of debt maturities and further measures
to lower debt servicing costs.
One can only hope, however, that an earlier
than expected election in Greece may be the catalyst for a more meaningful conversation
about the merits of austerity. It always seems somewhat simplistic to point out,
as I have on many occasions, that there are two parts to a debt-to-GDP ratio –
debt and GDP. In the case of Greece and
others in the euro zone austerity aimed at lowering the numerator ending up doing
more damage to the denominator - to such
an extent that in Greece the ratio now stands at 174%, higher than the onset of
the euro zone sovereign debt crisis.
I also take little comfort from IMF forecasts
indicating a drift lower in the ratio over the next few years. That projection assumes Greece will be able
to run primary budget surpluses averaging 4% of GDP over the next five
years. While few have little sympathy
for the woes of the Greek populous given past profligacy, that forecast ignores
the impossible political challenge of implementing such an austere program in
the face of what the leader of Syriza correctly describes as a “humanitarian
crisis”. A different approach is