Greece: Navigating a Program Exit and Political Threat

Published on October 24, 2014

The bold announcement by Greece’s Prime Minister Antonis Samaras of his intention to forgo the last year of assistance from the Troika and instead exit the massive 240 billion Euro joint EU, ECB, IMF bailout program at the end of this year could have served as a triumphant book-end to the Eurozone debt crisis from its original, and most severely stressed, victim.

Instead, it only helped precipitate a dramatic sell-off in Greek sovereign bonds by a market already jittery over European risk and the prospect of a potential collapse of the Samaras government by February or March of next year.

*** We believe that despite some continued ominous signs, Samaras will most likely be successful in navigating both an early bailout exit and averting if not surviving the potentially even more dangerous political challenges looming ahead of him next year. Needless to say, the road will be fraught with plenty of anxiety and risk. ***

*** We expect Samaras will negotiate and accept a program exit by the end of this year that will include an Enhanced Condition Credit Line backstop, along with the conditionality and surveillance attached to it. While not ideal, that arrangement would nevertheless represent and be presented as a marked improvement from the existing surveillance regime under the full Troika program. ***

*** Acceptance and agreement on an ECCL backstop (or if at all possible, but less likely, on the less onerous Precautionary Credit Line, PCL) may in turn also enhance support for concessions by the EU on Greece’s debt profile, as well as the continuation of support by the ECB of Greek banks through the recently announced lowered haircut on Greek sovereign bonds. A potentially even stronger than expected economic finish to 2014 we believe is also likely to help in those negotiations. ***

*** The challenge from Syriza and the specter of early elections this spring will not, however, go away easily, if at all. But despite alarming poll numbers we expect ultimately Samaras will be able to avert those elections by mustering the 180 votes in parliament needed to appoint a new President by February of next year and prevent the collapse of his government. ***

*** Independent delegates and small parties are currently showing no sign of throwing their support to Samaras’ New Democracy/Pasok ruling coalition to lift it from its current 155 vote bloc to over the 180 vote threshold. But we believe those swing votes will shift when faced with the threat of general elections. And even in the disruptive and politically dangerous scenario of a failed vote leading to snap elections, there is no guarantee Syriza would be able to win and form a government despite its current lead in the polls. ***

A Historic Negotiation with the Troika

The Troika is expected to come back to Greece next week after the release of the final results of the ECB’s Asset Quality Review (AQR) and stress tests of European banks. Once any necessary banking recapitalization results are formally in hand, the Troika will conduct the last review of the year to unblock a final 3.5 billion Euro tranche for 2014.

Athens does not expect any recapitalization needs to be particularly onerous — perhaps in the region of 1-2 billion Euros if any at all — and easily met through income or reserves without the need for major capital injections. We will know those final numbers this Sunday.

The Troika will, however, also need to come to an agreement with the Samaras government on some sticky budget concerns, specifically centered on the highly politically sensitive social security and labor market reforms.

The political sensitivity of those reform discussions may not be entirely lost on the Troika, especially in light of the fact that Samaras’ latest drop in ratings came right on the heels of the Greek population having received its first new property tax bills as promised this August and September – courtesy of the Troika program.

In light of all this, Athens is hoping to wrap up the review into a package agreement towards the end of the year, perhaps for the December 8-10 Eurogroup and Ecofin Finance Minsters’ meetings leading to the Heads of State summit on December 18, that would encompass the program more broadly, including with an economically unnecessary but politically critical agreement for an improvement in the terms of its existing loans either through lower rates or another maturity extension.

And importantly, despite the clear preference and an initial attempt to follow in the footstep of Ireland and Portugal and exit the program with no “parachute,” Samaras we believe is willing to negotiate an Enhanced Contingency Credit Line with the Troika, with the conditionality involved, as it forgoes the last 9 billion Euros it would have received from January 2015 to the original end date of the bailout program of March 2016.

Athens can note that it will have at the end of the year 11 billion Euros in unused funds left in its coffers, and that any review program attached to a credit facility, while not ideal, would certainly be less onerous than a full program review.

And while ECB President Mario Draghi explicitly conditioned the decision to lower haircuts on Greek and Cypriot sovereign bond on their remaining in a surveillance program (“no program, no purchases”), we believe the ECB may be willing to accept the conditionality of a PCL or ECCL credit line in place of a full program as well, especially in light of improving Greek economic numbers, and maintain the lower haircut on Greek bonds it announced on October 16.

That drop in the ECB haircuts has been estimated to provide up to 12 billion Euros of additional liquidity to Greek banks. Any concession by the EU on Greece’s existing debt profile will also clearly be more palatable if negotiated under the prospect of a credit facility and surveillance as well.

The review and overall negotiations will be conducted furthermore under the favorable backdrop of a continued recovery, and an extremely strong tourist season.

The Greek government this month yet again revised upwards its 2013 GDP, from -3.9% to -3.3% and forecasts are for this year’s GDP to cross over into positive territory. And in light of the strong summer, observers in Athens believe the Q3 GDP release on November 14 could register stronger numbers than the current median forecast, and maybe even close to 1%.

A Dangerous Threat from Tsipras

The pressure on markets from Samaras’ announcement of a potentially imminent, and “naked,” exit from the Troika program was further exacerbated by the specter of looming snap election and political risk, and polls that show the leftist Syriza party opening a four to seven point lead on Samaras’ center-right New Democracy party.

And a confidence vote on October 10 that was meant to be a show of force by Samaras against the increasingly dangerous political challenge from populist left-wing firebrand Syria leader Alexis Tsipras backfired badly.

That vote instead passed by the narrowest of party lines, with not a single delegate outside of Samaras’ 155 member New Democracy and Pasok coalition, out of a parliament of 300, voting for the government.

That has kept alive very real concerns over the risk of snap elections, and a potentially dramatic change in Greece’s government early next year, when a new President will need to be chosen and voted in by parliament by an at least 180 vote majority.

In order to break the 180 vote hurdle, Samaras, whose 155 coalition seats are split between his New Democracy (127 seats), and Evangelos Venizelos’ center-left Pasok (28 seats), will need to find an additional 25 votes from a combination of two or three sources.

Those are the 23 independent or unaffiliated delegates, the 10 delegates from the Democratic Left or DIMAR party, who at one point formed the third leg of the ND/Pasok coalition before dropping out, or the 10 delegates from the Independent Greeks on the right, who are naturally far closer to the ND certainly than to Syriza.

The rest of the parliament is untouchable – made up of the opposition Syriza party (71 seats), the Communist KKE (12 seats), and the neo-Nazi Golden Dawn (16 seats).

While Samaras’ potential allies refused to vote along with the government in the October 10 confidence motion, that vote was sure to pass on the coalition’s votes alone, and therefore an abstention was a free protest vote that bore no negative consequences. That dynamic will not hold true for a Presidential vote, which would lead to snap elections were it to fail.

The five year term of the current President Karolos Papoulias is slated to expire on March 12, 2015, and by Greek law the election process is supposed to start one month before, on February 12.

The vote for Presidency may actually be conducted in three rounds if needed, on a sliding hurdle until it reaches the 60% threshold of 180 out 300 seats, and if that fails the country goes to general elections. It is assumed that the vote will come down to the 180 vote threshold.

If the country goes to early elections, the problem for both the smaller DIMAR and Independent Greek parties apparently is that they are also quite vulnerable. Recent polls suggest they may fail to meet the 5% threshold required to make it into parliament as a party if the country were to hold snap elections, and furthermore, the anti-incumbency sentiment and vulnerability also extends to many of the currently 23 unaffiliated delegates.

Current rough guesstimates, and that is all they are at this point in time, are that Samaras may have up to 170-175 votes as things stand from a combination of these three groups. The likelihood is that he will, even if it is not without a great deal of drama, manage to squeeze the last votes necessary to squeak by given the reality of the political landscape facing these swing delegates. A reasonable success with the EU and Troika on a smooth bailout exit would obviously go a long way towards helping make that a reality.

In the more alarming scenario of a collapse and early elections, all bets are off.

But even then political observers note that although Syriza leads in the polls, it may have a hard time winning a general election or if so forming a government even if it is the party with the largest number of votes.

Under the Greek electoral system the leading party is allotted 50 bonus seats, which lowers the hurdle to forming a government but still, in practical terms, means the hurdle to victory lies in the 35-37% popular vote range.

While Syriza may be uncomfortably close to that in the polls, they are not there, at least not yet.

And Syriza’s ability to form a coalition may be in question, although there are concerns that some Pasok members may choose, if the tide were to turn, to bolt from the ND coalition towards them and back further to the left.

Of course a far preferable outcome for stability and markets would be the avoidance of the early elections altogether. And we believe despite the ominous polling that is the more likely outcome.

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