Greece: A Look through the Election Fever

Published on May 16, 2014

Greek financial markets, pressured by a broader global equity market correction, sold off sharply yesterday and remain weak on rising concerns over political stability and a potential new tax on foreign holdings of Greek bonds.

The tax question at least was quickly clarified as simple confusion over an ill-timed circular released by the Finance Ministry, but the jitters over political stability remain, primarily because the populist anti-establishment Syriza party, led by firebrand Alexis Tsipras, is consistently polling strongly against the incumbent center right New Democracy party of Antonis Samaras, with the government’s coalition partner, the socialist Pasok party, in a literal free-fall.

*** But for all the high pitched political fever, a relative ho-hum election result these next two weeks that affirms some stability and continuation of the current status quo is the most likely outcome. And for all practical purposes, that would be taken as a positive event likely to open the door to an EU agreement to reschedule Greek debt. Greek Finance Minister Yannis Stournaras already presented a debt maturity and rate rescheduling proposal to the Eurogroup at its May 5 meeting. It has been quietly shelved until the fall after European parliamentary elections are cleared and the new EU legislature and the new Commision are in place, but we suspect it is indeed likely to be endorsed. ***

*** Even in an unlikely worst case scenario for markets of a strong Syriza victory that led to an early collapse of the Samaras coalition and, even less likely, to an eventual Syriza-led government, Tsipras has been careful to steer clear of attacking the Eurozone structure even as he has vowed to aggressively renegotiate Greece’s bailout package with the Troika. While this would be seen as problematic for some Greek bondholders, it would certainly not translate into anything close to the “Grexit” mass hysteria experienced by markets and certain analysts back in 2010-11 (so spare us that please, this time around). ***

*** Ironically, the sense that a Syriza victory would in no way result in the expulsion of Greece from the EU or Eurozone could however bolster Tsipras’ showing in the European Parliamentary elections next week, which are generally seen by electorates across Europe as a symbolic vote for positions of no real power and thus a good opportunity to lodge a “free” protest (with apologies to Strasbourg). But Syriza may fail to carry that momentum when it comes to the local and municipal elections that will be held this Sunday, with runoffs where needed that will coincide with next weekend’s EP elections. Informed political observers suggest that when it comes to those elections, when studied at the more granular, race by race level, the establishment parties actually continue to maintain a significant advantage over Syriza in both candidates and infrastructure. ***

Rewarding Stability

If the Samaras coalition is weakened but remains intact after this round of elections, it would represent the removal of one of the last remaining hurdles for the EU to reward Greece for its hard efforts to date – and in the process paint a more positive picture of its own reform programs.

The April 23 Eurostat release confirmed Greece has turned the corner to a primary budget surplus, and with a successful bond issue that suddenly seems like so long ago, we understand EU officials are looking much more favorably on the efforts to date by the Samaras government.

And we believe there is overall broad support for a potential extension of the maturity schedule of Greece’s payments, from 30 to perhaps as long as 50 years, and even with a fixed as opposed to variable interest rate locked in to boot. A pushback of amortization bullets has also been proposed.

In particular, German Chancellor Angela Merkel is known to have a strong relationship with Samaras, and is keen to help pave the path for a successful Greek return to markets. And that, of course, would also help Samaras in any future political challenge when general elections were in fact to come.

The IMF, ever gracious and generous with stimulus and other people’s money, is believed to be supportive as well.

A Game of Small Margins

Even were this weekend’s local elections in Greece and next weekend’s run-off and simultaneous European Parliament elections to indeed affirm the momentum behind Syriza, and crush Pasok in the process, its impact and the actual mechanism for translating that victory into potential early Greek parliamentary elections would be far less clear-cut than assumed (more below).

Generic polls in the run up to elections this weekend and next show Syriza leading New Democracy by anywhere from 0.5% to 4% points. But that looks less impressive given that Syriza in fact started the year with a 3% point lead over ND.

So from a political perspective, if that gap is narrowed to something south of roughly 1.5 or even 2%, it will be seen by ND as a small victory of sorts.

Of course the problem is not so much with the ND itself, but with its coalition partner Pasok, the former mighty socialist party of Greece that is now trying to reinvent itself by running under the banner of the Elia (Olive) coalition.

Pasok (or Elia), has been left in tatters by the debt crisis and is polling around a near-cellar level 5%. Its highly unpopular head, Evangelos Venizelos, is being personally blamed for the party’s slump in the polls from 12%, and he has darkly warned of the dangers of an electorate glibly using a “free” vote to punish incumbents.

Needless to say, Syriza for its part has been aggressively attacking the coalition’s mandate to govern after these elections, which between them will only represent roughly 24% or at the very most 30% of the electorate. But of course neither vote will have any direct bearing on the parliamentary seat count, where ND and Pasok hold a slim 152 seat majority. The coalition will clearly however be damaged.

And while we have dismissed any threats to the coalition in the past in that Pasok, were it to leave, has had no place to go, the danger now is that the calculus may have changed, as its support has fallen so far that it may be facing an existential crisis of survival.

If Pasok is crushed, as expected, Venizelos could be forced out as leader, even as the rest of the candidates remain in the coalition. But there is no heir apparent in the party, with former Prime Minister Papandreou too tainted with previously failed policies to personally mount a comeback. Of course, as is more than often the case with Venizelos’ bluster, he could alternatively just cling along with his party members in a shaky coalition.

The broader assumption by political analysts either way is that it will be hard for the two parties at that point to govern for an extended period of time, with a very real potential flash point emerging in February or March of 2015 when the Greek Parliament will have to elected a new President.

A new President will require 180 out of 300 votes to win, and there is the possibility a weakened ND would fail to achieve that and need to call early elections by then, if not before that in face of any controversial votes. Samaras has been pushing for constitutional changes that would include direct elections for the post of the Presidency as well as other “populist” cuts to the number of MPs. But it is widely believed that no reform can be implemented before 2016 – and indeed Greek media have been dismissing this effort as a mere publicity stunt by Samaras.

We are also told that despite its slim 152 vote majority, the coalition continues to enjoy the “soft” support of the DIMAR party and a couple of independents, putting their true vote count at closer to 165-167. DIMAR itself looks like it will be punished in these election rounds, but again that will have no immediate bearing on seat counts.

The biggest change for the Greek electoral landscape going forward has been the rise of the Potami (or River) Party that is expected to gain anywhere from 8-10% of the votes next week.

Started by a former journalist, Potami is loosely based on Italy’s Five Star Movement of Beppe Grillo, with a couple of key distinctions, including that its leader is not an eccentric buffoon and its platform is not anti-Euro. It is instead a vaguely defined, populist socialist alternative to the establishment parties. Needless to say, the party is very attractive to the (many) disappointed traditional Pasok voters.

Critically, that also means that this new party may even be able to fill in the gap in a new coalition, even perhaps with ND, were it to be needed after new elections.

The Elections That Matter Now

Next Sunday’s elections for representatives to the European Parliament are much higher profile than the local and municipal elections this weekend, but it is the local elections that will have most direct immediate bearing on governability of the current government.

And here our understanding is that the political landscape strongly favors the incumbents and status quo in some key races.

Elections will be held for 13 prefectures and all the municipalities of Greece, but there are five in particular that we are told are most important to watch, as they represent 60% of Greece’s population.

Those are the prefectures of Attica (Athens) and Central Macedonia (Thessaloniki), and the municipalities themselves of Athens, Thessaloniki, the second city, and the port city of Piraeus.

Four out of five of those we are told should go either to the ND or PASOK, in the first if not second round, with only Attica in question, where a young female Syriza candidate is giving the incumbent a run for his money. But even here the challenger has only managed to narrow the gap and is not yet in the lead.

We are hesitant to take it that far, but if the results stand as we expect, this weekend’s municipal elections may even take some wind out of the sails of the turnout for Syriza (or anyone for that matter) in next weekend’s European parliamentary elections. And while another typically low turnout EP election may not be such a good thing for democracy, it would bode well for the status quo.

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