Greece: Syriza and its Eurozone Partners

Published on January 12, 2015

As Greece moves closer to its historic national election on January 25, the lead in the polls held by the radical-left Syriza party headed by Alexis Tsipras over incumbent center-right Prime Minister and New Democracy head Antonis Samaras has, as we expected, narrowed.

But despite the narrowing in some polls of the Syriza lead to just under 3%, and with two weeks of campaigning still to go, the lead nevertheless remains. There is therefore a widespread expectation now in political circles in Athens, including even privately among many center-right supporters, that this time around Syriza will likely pull off a victory.

The momentum that has enabled Syriza to maintain its lead in the polls has been boosted by the expectation some of its more aggressive demands – namely a drastic haircut on Greece’s 240 billion Euro debt burden – will be tempered by the need to form a coalition government to get into power. That narrative also assumes the Eurozone will show a willingness to accommodate Greece in order to ensure its recovery and viability within the Eurozone area. That is possible, perhaps even likely, but it will not be as easy as it may seem.

*** We believe a recent report in the German press of a willingness in Berlin to consider a 30-50% debt haircut to be very wide off the mark. Rather, what we have been pointed to in our own discussions with Eurozone officials is the possibility of following through on a soft “promise,” more a hint, made in 2012 by Eurozone officials to Athens of a further debt maturity extension, moratorium on payments, or lowering of rates once Greece achieved a primary account surplus, which it has clearly done by now. ***

*** But for that to happen a new government would still have to maintain a small primary surplus – something Syriza has said it will not do, pledging to draw Greece’s primary budget surplus down to zero in order to fund social programs. In other words, a deal for Greece could shape up it has been suggested to us as a re-profiling of debt, but only in exchange for assurances that the hard fought gains in the primary budget balance, along with other austerity measures, will not be entirely reversed. That on first blush will fly in the face of many of Syriza’s campaign promises. ***

*** Tsipras has nevertheless promised to at least pay the March debt payments that come due in full, and his advisors have hinted at seeking a few months of breathing space to negotiate new terms with the EU creditors. If negotiations proceed in good faith, the ECB could if necessary approve a short term allowance for the central bank for Emergency Liquidity Assistance to Greek banks, and the government cash balances can take it through the middle of the year. Barring a disastrous turn of events or bank run, the real drop dead date for negotiations may therefore not come until redemptions in July and August. Indeed the biggest risk to orderly even if contentious negotiations may not even come from an aggressive Tsipras, but rather a political vacuum – an unsuccessful post-election coalition process or unstable government that could spell the death-knell for any negotiations with Greece. ***

A compromise on primary surplus targets and debt re-profiling could, incidentally, readily be extended to a New Democracy government, and not just under bluster of threats and duress to a Syriza led regime. There is also an interesting parallel to this in that a small primary surplus is exactly what Italian Prime Minister Matteo Renzi just negotiated with Brussels and the European Commission last fall – a compromise between the larger savings required under European fiscal rules and the government’s necessity to stimulate growth.

It is also worth mentioning that a European Commission “Communication” on greater flexibility for investment spending that was negotiated at the time of President Jean-Claude Juncker’s appointment is being discussed as we write by the European Parliament. This could also clearly help the Greek government in upcoming negotiations.

Syriza and the Lead

The growing consensus both in Greece and in markets is that Syriza will win but be unable to garner enough votes to form a government without a coalition partner. Historically, in Greece, a party has needed to gain anywhere between 32-39%, usually somewhere around 34-36%, of the popular vote in order to be able to form, with the help of 50 bonus seats awarded the winner, a government on its own.

The reason the range can fluctuate so much is that under Greek electoral law, popular votes that go to parties which do not clear the 3% threshold required for representation in parliament are allocated proportionally among the parties that do, so the number of votes for the small parties will matter.

We warn that while looking at current polls, for Syriza to clear that hurdle for the formation of a government on its own appears unlikely, it is certainly not impossible.

Of course there is a chance on the other side that Samaras and New Democracy close the gap and pull off a surprise victory over Syriza. But there does not appear to be much hope for that outcome even within the ranks of the ND itself in Athens.

The surprise last minute entry into the fray of former Prime Minister George Papandreou as an alternative moderate left candidate appears to have had little impact for now in cutting into Syriza’s voting base.

And most problematic for Samaras, Tsipras has been effective in countering Samaras’ dire warnings over a “Grexit” and the consequences of a vote for Syriza, and successful in his efforts at portraying Syriza in a less radical and more pragmatic light to voters. Samaras’ warnings are in effect now increasingly being perceived as “crying wolf.”

Tsipras’ proxies have been especially careful to dodge repeated media questions over what they would do if German Chancellor Angela Merkel were to refuse to write down Greek debt.

Forming a Coalition

The most likely coalition partner for Syriza is the new party To Potami (“The River”), currently running in third place behind Syriza and ND, or possibly even the center-left Pasok that has been in coalition with New Democracy.

Papandreou, from the political dynasty associated with the old Pasok, entered the fray to the left of Pasok and would clearly relish the prospect of serving as a coalition “rudder” to the far-left Syriza. But his Democratic Socialist party appears unlikely to clear the 3% threshold as polls currently stand.

Among the other small parties, there was some chatter in December of an odd-ball marriage of convenience between the nationalist (but anti-Troika) Independent Greeks and Syriza, but that tie-up in reality is hard to imagine. Similarly, even if the KKE Communist party puts in a strong showing there is no talk of cooperation whatsoever between them and Syriza.

So the assumption is that To Potami, possibly along with Pasok, will bring a pragmatic bent to negotiations that will either temper, or perhaps even serve as convenient political cover for Syriza to back off its most extreme demands once it is in government.

Tsipras, however, is unlikely to easily abandon the very flagship of his long-standing campaign pledge for significant debt relief. So it is perhaps a bit sanguine to assume that either coalition discussions or negotiation discussions with the Eurozone will go quite as smoothly as markets may assume.

Incidentally, coalition negotiations will be complicated even in the unlikely case of a Samaras victory. New Democracy will most probably have to turn to two parties if not more to form a government, as this time around the hobbled Pasok will only be able to deliver perhaps 10, as opposed to 30 or so, seats to a coalition.

But that would be a problem markets would clearly be more than relieved to deal with than a Syriza-led government.

Circling Around the Money

The “new and more moderate” Syriza officials have hinted that if they come into office they may seek a few months extension of the Troika program before bringing any negotiations to a head, and Tsipras himself has assured that near-term payments due in March will be covered in the process.

In the meantime there are 11 billion Euros remaining of unused funds in the Hellenic Financial Stability Fund (HFSF) that have been eyed by Athens to fund the government or lower Greece’s debt burden. The optimal use of those funds has been a matter of negotiation by the Samaras government with the Troika as well.

And barring a run on banks, the government’s cash situation appears to be reasonably strong through the first half of 2015. If Greek banks need funding the ECB may be willing to allow the Greek Central Bank to provide ELA (Emergency Liquidity Assistance) funding for a few months, perhaps up to six months, if the country remains temporarily out of an approved program and banks do not have access to the ECB window. Greek banks are currently tapping the ECB for approximately 45 billion Euros.

Indeed, the true drop dead date for Greece may not be until later in the year, with bond redemptions coming in July and August. But that assumes a constructive track on negotiations.

The near term risk is not just that Tsipras proves true to radical form, but that the struggle between his own left wing and his pragmatist wing scuppers coalition talks or leads to an extended period of uncertainty in the formation, if not stability, of a new government.

A lengthy period of uncertainty or, worse yet, a second round of elections could prolong a period of a dangerous financial vacuum for the central bank.

If there is no program extension, or Precautionary Credit Line, and as any ELA relief (requiring a 2/3 vote to for approval by the ECB Governing Council) can by law only be temporary, the Greek government would soon have to issue Treasuries to fund any shortfalls in bank funding. The government is already at its 15 billion Euro issuance limit negotiated with the Troika The problems with that scenario, in a stress environment, are obvious.

The chances are that cooler heads will indeed prevail and avert disaster scenarios, and Greece may even get its modest deal on debt relief. But it is the risk of such an asphyxiation scenario in case of a political vacuum or post-election instability that is far more on point than the easy to dismiss speculation (or wishes for) any deliberate push by either side, Athens or Berlin, for a “Grexit.”

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