Greece: September Elections and Deal

Published on July 31, 2015

Officials from the newly dubbed “Quadriga” (the EU, IMF, ECB and – new to the game – the ESM) arrived in Athens last Monday on the thankless mission of quantifying the real magnitude of Greece’s budget deficit as negotiations officially kick off to determine the full extent of measures the Greek government will have to implement within the framework of the new – and already agreed to in principle – 86 billion Euro bailout package.

 

In the meantime, there has been a good deal of excitement ginned up by the press and analysts over political risks in Athens, be it revolts within Syriza, the risk of early elections, or problems with the IMF.

 

*** As we have been predicting now for months, for all the domestic challenges Greek Prime Minister Alexis Tsipras faced and will still have to face after striking a painful compromise bailout deal with the EU, the political agenda is and will continue to be driven by a strengthened – not weakened – Tsipras; he has been polling a whopping 60% in the most recent popular personality polls and still leading a party that is maintaining an all but insurmountable 15-20% lead over the New Democracy opposition. ***

 

*** Furthermore, not only have we been expecting Tsipras to survive any defections from the noisy and restless Left Platform of Syriza, as was indeed played out in last night’s internal Central Committee meeting, we continue to expect Tsipras to be further strengthened by elections that now look all but inevitable for September. ***

 

*** When it comes to negotiations with the creditors, there has been some alarm generated recently over press reports the IMF staff has instructed the Fund’s Board not to participate in further bailouts for Greece. But that headline, while accurately reflecting real reticence by IMF members in lending additional funds to Greece, is misleading. The IMF continues to press for more substantial debt relief IF it is to participate, and has NOT shut the door to new funding. ***

 

*** We did nevertheless warn early on that the IMF would at a minimum not participate in the first few tranches of the new bailout for Greece until the bank and debt sustainability reviews were completed (see SGH 7/22/15, “Greece: From Here to Elections and Cash”). So this IMF position is, as emphasized by EU officials, not news to policymakers. But of course were the IMF to ultimately choose not to participate in any further funding to Greece, it could present political complications down the road, especially in Berlin, even if they were as is certain agree to continue to provide monitoring assistance. We do not expect that to happen, and even if it does it may not ultimately be a deal breaker. ***

 

*** An agreement on the new Memorandum at this point may not be finalized until AFTER the deadline set for August 11 by European officials as the last day that would allow for ESM disbursement to be made in time for Greece to meet the August 20 ECB bullet payment. If this is the case, instead of voting on the Memorandum, the Greek Parliament will vote on August 17 or 18 when it comes back from a one week break on an agreement on a new EFSM bridge financing, together perhaps with the third, most controversial, set of “prior actions” related to Farm Taxes that has so far been postponed and was initially hoped to be passed before August 7. ***

 

*** In the less likely event of the successful conclusion of negotiations BEFORE the August 11 deadline, the Greek Parliament will have to pass – the earlier the better – the third set of prior actions together with the Memorandum in order to get the ESM disbursement. While this is certainly the preferred outcome by both sides involved in the negotiations, it is an aggressive time-frame. If not met, another bridge financing agreement would not represent a major hurdle, despite unattributed warnings today in the press surely directed at Athens that a bridge deal might have to come with additional demands were it to be needed. ***

 

*** We in any case expect both votes in the Greek Parliament to pass with an ample majority, albeit not as wide as the July 15 and July 22 votes. Greek MPs will have little interest in rocking the boat before the first ESM transfer is secured and the Memorandum is signed, and all eyes are increasingly set now on the likely elections in September. ***

 

Tsipras, Syriza, and September Elections

 

For all the talk of splits and defections, what Tsipras did last night through the arcana of internal Syriza party politics was start the process of consolidating his position in preparation for early elections. He did that by forcing through an agreement by the party’s Central Committee to call for an “Extraordinary Congress” in September to review the bailout agreement.

 

Tsipras’s original proposal was to call for a referendum on the bailout agreement by all party members, a move likely to have given him an overwhelming majority, while the party “establishment” was pushing for an “Ordinary Congress,” with only the more senior delegates who are disproportionately unsupportive of the Prime Minister allowed to vote.

 

While a compromise on an Extraordinary Congress was not as good as a full membership vote, it was nevertheless a powerful victory for Tsipras.

 

As Left Platform leader Panagiatos Lafazanis subsequently griped, the agreement to hold an Extraordinary Congress in September is far enough out to essentially present a “fait accompli” on EU budget negotiations for Syriza to vote on. But perhaps even more importantly, it is also a format that will still include the party’s more junior delegates, among whom Tsipras has extraordinary support.

 

We expect that internal September Syriza Congress to result in a show of strength for Tsipras that will give him an upper hand going into the elections, even factoring in the potential for a limited splintering off of the Left Platform or parts of it from Syriza as is now increasingly expected in political circles in Athens.

 

Defections and Elections

 

The accelerated potential electoral schedule is being driven not just by an attempt by Tsipras to cash in on his current high levels of popularity and timeline of negotiations with the EU program, but by Greek constitutional law requiring the government to submit the first draft of its 2016 budget to parliament by the first Monday of October (give or take a bit).

 

That budget will need to address the gaps sure to be unearthed by the “Quadriga,” and its passage – the Greek parliament is supposed to pass it in November but can go back and forth on it until the end of the year – will be sure to be controversial and contentious. That means Tsipras is well served to have the political base within his restive Syriza party set and solidified well before that process begins.

 

And that clearing up of internal defectors from Syriza, from a window of strength, is exactly what is now going on.

Under Greek law, a parliamentarian that defects from his party is not required to give his seat back and can stay on as an Independent or even switch to other parties – and that is indeed what happened to the center- left PASOK defections as it self-imploded under the last two parliaments.

 

But from what we understand, in order to avoid the fate of the other major parties, the members of the disparate Syriza coalition in happier times internally agreed to voluntarily return their seats to the party if a break were to happen – which would by law then be filled by the runner-up.

 

Whether the far left holds to that end of the bargain is to seen, but it certainly is yet another disincentive to defections, and further evidence of what we have asserted before to be greater party unity within Syriza than widely assumed by analysts keyed in on all the in-fighting and fissures that carried on by the party in public.

 

There will nevertheless be defections, and even a potential formal split of a rump from the party, and Tsipras is clearly maneuvering to both limit the extent of those and strengthen his position further through early elections.

 

The faction led by former Energy Minister Lafazanis, which has been overtly advocating a return to the Drachma and has strong support in the traditional, yet small, base of the party, will not – from what we hear – backtrack from its position, an open dissent with Tsipras’ handling of the negotiations.

 

Having been marginalized by Tsipras’ sudden turn to the center as well by the Prime Minister’s increasing popularity, and almost certain that he will not be a candidate in the upcoming national elections, we expect Lafazanis will form his own group in the Greek Parliament, and most likely proceed to found another party, after the September Syriza Congress.

 

A Closing Window

 

The upcoming fight within Syriza will also be a fight for the name and symbol of the party. In the event of a split, it will be crucial for Tsipras not to lose the brand name because of its popularity not only with voters, but also with its financial backers. There is little risk of that actually happening.

 

And with a 60% approval rating and no opponents on the horizon, Tsipras will, once the congress is over, call elections from a position of strength, running candidates he wants and stuffing the Greek Parliament with MPs who are faithful to him.

 

He will need to move quickly though, as deferred income tax bills hit in force in August, and the highly unpopular ENFIA real estate taxes hit in September.

 

But if the bailout and Memorandum – as we still fully expect – includes a plan for future debt relief, we would even go as far as to say that Tsipras and his reformulated Syriza may well run on the “Program,” and not against it – a painful compromise that saved Greece’s position in the Eurozone.

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