By Gerren Bethel, Deputy Editor at Finance Publishing
Economic and political leaders from across the globe waited eagerly for the results of Greece’s general elections on Sunday, January 25, 2015. After an anxious wait, as the votes rolled in, the victor was in the end announced as the far-left Syriza Party, headed up by Alexis Tsipras, who has since been sworn into his position as prime minister, the nation’s head role. Syriza, an acronym standing for the Radical Coalition of the Left (or Coalition of the Radical Left), was formed in 2004 and is led by Mr Tsipras, age 40, a political figure who first came to prominence after the 2008 Greek riots. The votes counted in January’s poll indicated that Syriza had 149 seats, just two short of an absolute majority, while the Greek Independence Party (also known as the Independent Greeks) took 13 seats in the 300-seat Parliament. The results of the election have left the Greek public with a coalition structure (Syriza and Independent Greeks) set up at the helm—one that is most determined to lead from a position of anti-austerity political measures and corresponding national monetary and fiscal policy—guided by the platform, values and firm stance of Mr Tsipras and his Syriza party. Although Greece’s political policy and leadership team may be balanced out to a certain degree by the other coalition member—the centre-right Independent Greeks. The Independents are a right-wing party formed in 2012 as a New Democracy splinter party. Both parties are united in their views of wanting to end austerity and on renegotiating Greece’s debt—with Syriza operating from an anti-austerity platform and the Independent Greeks from an anti-bailout-policy stance.
It is the aggressive anti-austerity stance of the Syriza party that has captured the attention of political and economic leaders worldwide—with the question of Greece exiting the Eurozone altogether hanging in the balance and the consequences of which being felt across the globe in this increasingly globalised and interconnected marketplace. The risks and implications of this potential Grexit (Greek exit) action are of concern to a broad range of market and political participants, economic advisers, investors, communities and consumers across the globe. The election result has, therefore, created uncertainty within the global marketplace. For example, Tom Elliott, international investment strategist at deVere Group (which has $10 billion under advice from 80,000 clients), has commented on the result of anti-austerity party Syriza emerging victorious and forming an agreement to form a coalition government with the right-wing, anti-bailout Independent Greeks. Mr Elliott has remarked that “investors can expect Greek-led market volatility for at least six months until a Syriza-led government is better understood.” The impact of a sudden market jolt has the potential to create a shock in capital-asset markets that will ripple around into a wide range of economic circles, of both small and large size—most of which are operating under vulnerable conditions as it is. The global economy has been struggling to develop growth and momentum—the rate of growth in China is on the decline; oil has fallen to concerningly low price levels, exposing numerous national economies to significant risk; the Russian economy is suffering based on both economic troubles and political conflicts; and the Eurozone has been persistently struggling to achieve any kind of substantial economic growth momentum since the financial crisis more than six years ago in 2007-2008.
The Eurozone has failed to develop momentum when it comes to growth and economic stimulation over the past few years—although the region’s performance has been boosted somewhat by the recent ECB (European Central Bank) announcement of a plan of substantial quantitative easing. This type of action has worked effectively in the US, which has now in fact wound down its asset-purchasing programme and is enjoying improved consumer spending, investment, wages and employment, driving economic traction forward. Greece’s political and economic policy risks may damage the wider and worthwhile gains that could be achieved across Europe from the ECB’s quantitative-easing programme. Jean-Claude Juncker, the European Commission’s head, has publicly expressed this concern, reminding the new Greek prime minister, Mr Tsipras, of the need to “ensure fiscal responsibility” as part of his congratulatory comments. Mr Juncker further added through a tweet that “the European Commission stands ready to continue assisting Greece in achieving these goals”, referring specifically to “promoting sustainable jobs and growth” for the nation.
On a global platform, the key concern has been the Greek political leadership’s policy on debt management. The Greek bailout extension has a looming deadline of February 28, soon to be followed by a 3.5-billion euro-value maturation of euro bonds on July 20 of this year. Economists estimate that Greece needs to raise approximately 4.3 billion euros in the first quarter of 2015 to make debt payments on time. Therefore the possibility of having to ask the International Monetary Fund and Eurozone countries for substantial extensions is a realistic and likely outcome. However, Syriza has instead outlined a debt write-off policy that has shaken the Eurozone and European markets—promising the electorate a debt-management programme that involves write-offs of the majority of Greece’s €319 billion ($363 billion, £239 billion) debt, which is a massive 175 percent of its current gross domestic product (GDP). Tasked with meeting its voters’ expectations, the left-wing party that obtained power with 36 percent of the votes has promised to cut austerity measures and renegotiate the country’s bailout with both the European Union (EU) and International Monetary Fund (IMF). Further to this, Syriza also has plans to achieve repayment of the remaining debt in line with economic growth rather than the Greek budget and to implement a “significant moratorium” on debt payments. In addition, the party has outlined plans for a purchase of Greek sovereign bonds under the ECB’s €60 billion ($68 billion, £45 billion) monthly programme of quantitative easing. Further to this, and perhaps one of the more attention-grabbing policy suggestions since they took over political power of Greece late in January, is that Syriza wants Germany to repay a loan that the Nazis forced the Bank of Greece to pay during the occupation, amounting to an estimated €11 billion ($12.5 billion, £8.2 billion) today—a stance of which the Independent Greeks are in strong support and in fact would like to expand further to compel Germany to additionally pay war reparations to Greece.
The results of this election have the potential to set off another Eurozone crisis. Seventy-six percent of the debt that Greece wants to write down is held by public institutions—through EU bail-out funds, the ECB and the IMF (the so called “Troika” of lenders set up in 2010 to support the collapsing Greek economy ). This means that a substantial debt write-down would lead to outright losses for taxpayers in Germany, Finland, the Netherlands and elsewhere across Europe (most likely via bail-out funds, since the IMF and ECB are more likely to refuse the loss absorption associated with a write-down programme). This type of action would be politically dangerous and explosive in these nations—exacerbating already growing levels of discontent from their electorates. The proposed write-downs may furthermore actually be illegal under German and European law— creating an illegal “transfer union” structure within the European Union zone for the first time. Prolonging the loans’ maturities further and lowering interest rates on the outstanding Greek debts will also not achieve much effect as Greece’s borrowing cost has already fallen substantially and does not have much room to fall further with interest rates at rock-bottom levels across the EU region. The Eurozone cannot offer Greece more relaxed economic targets compared to nations that are not operating with bailouts, such as France and Italy—which is what Syriza is suggesting. These types of self-interested policy propositions from Greece are causing turmoil both across the European region but also within economic markets—increasing volatility and reducing investor confidence in Europe and further stifling growth through lack of incoming capital.
Although the new Greek prime minister has stated that Greece will not default on its debts and will instead look to negotiate, concerns are mounting. “We won’t get into a mutually destructive clash, but we will not continue a policy of subjection,” said the left-wing Syriza party leader the Wednesday after the Greek general election. Greek bank stocks slumped more than 25 percent that day, adding to three days of price falls. Commenting on these debt-policy suggestions, Germany’s vice chancellor, Sigmar Gabriel, has stated his view that it is unfair of Greece to expect other states to pick up its bills. “I cannot imagine a haircut [debt reduction],” Mr Gabriel has commented. “Our aim must be to keep Greece in the Eurozone, but solidarity and fairness work both ways,” he stated, signalling the growing clash of agendas. Comments from the Netherlands and the Dutch national finance minister have joined those from Germany and France in insisting that Greece honour its previous commitments fully and properly based on principles of fairness and market stability.
The coalition held its first cabinet meeting at the Greek Parliament on January 28—with global focus now zeroing in on the newly announced finance minister, Yanis Varoufakis (Syriza), and the newly appointed Greek foreign minister, Nikos Kotzias (Syriza). How these two political figures negotiate ties with foreign nations regarding the related debts will be central to both Greek and European economic growth and development. Understandably government leaders from across the European continent are opposed to the debt write-off policies, and this has set into motion real concerns of a Grexit, as Greece may end up leaving Europe if a middle ground cannot be found and an agreement of terms cannot be reached. Although Alexis Tsipras has attempted to reassure his European partners that negotiations will be fruitful and effective, the matter continues to concern investors and political intermediaries across the globe.
From the outset it may appear that the clash of ideas between European nations may leave Greece no choice but to leave the EU. However, there are a number of reasons to believe that the Grexit will not happen. To begin with, opinion polls have indicated that a clear majority of the Greek population—approximately 70 percent—want to remain in the Eurozone despite the involved costs. The general electorate deem membership within Europe as a break away from an unstable past and a move towards a more reliable future as well as a better system of national politics. In addition, the Syriza party may not even be able to take Greece out of the Eurozone, a huge step that requires a public mandate. It is most likely that Greece will not leave the EU but will instead work with EU leaders to reach a deal that suits both sides of the discussion. This may, however, involve Greece exiting the euro currency and returning to the use of the former Greek currency, the drachma. Exiting the currency is not a likely outcome, but it remains a possibility.
Mr Elliott of deVere Group has commented, “Syriza believes European partners to be more willing to move on the debt problem (cutting the face amount of the debt and reducing interest charges) than they are. There is no treaty arrangement that allows ECB to cut the face value of the debt. Some in Northern Europe will be hoping Greece paints itself into a corner and is forced to leave.” However, it will continue pushing for policy that meets Greece’s needs on much more favourable terms. For example, Greece is already suggesting that they want to link interest payments on their debts to economic growth somehow, extend the maturities of their loans and ease the structural reforms that were put in place at the time of the bailouts. Agreement on these matters may be achievable—writing off outstanding debt, however, is an altogether different matter that, more so than any other factor, leaves open the possibility of a Grexit. In the end it is most likely that the Troika will offer a face-saving deal for Syriza, possibly involving an extension of the maturity on the EUR 4.5 billion due in March 2015, for which Syriza may have to cut public-spending plans in return—such as through having to limit minimum pay rises as well as shelving proposals to increase pensions.
A Syriza-led government is unlikely to unilaterally remove Greece from the Eurozone. The bargaining power of Syriza has been reduced significantly from what it may have been several years ago as the risk of contagion that has the potential to stem from a Grexit has been reduced. The financial system across Europe has been restructured so that were Greece to exit, the impact across Europe, although substantial, would not be anywhere near as damaging as it would have been several years ago. Measures such as liquidity buffers, balance-sheet strengthening and a reduction in the holdings of poor-quality assets through regulatory restrictions have added resilience to the wider European financial system. This means that a Grexit would be a far worse outcome for Greece itself overall than for the remaining EU nations. This balance of factors is signalling that Syriza would not actually leave the union. Syriza is, therefore, much more likely to attempt to negotiate an agreement of terms—although the suggestions of Mr Tsipras will probably be especially favourable and pushy in terms relating to Greece as he seeks to meet his far-left party aims, including those of certain radical groups within the party and those of the wider electorate who have voted Mr Tsipras into power.
Director of Education Dr Rob Straw at the Swiss Finance Institute also believes that a Grexit is an unlikely outcome, commenting, “I don’t see Greece as exiting the Euro. Both sides have too much to lose: Greece would fall even further, and the EU would lose face—and perhaps be the beginning of the end of the Euro. Both sides will have to find compromises. The new Greek government will have probably already discovered that the promises made during elections can never be met. The EU will be quite forgiving of debts in order to shore up support in Greece. They’ll either ‘kiss and make up’ or at least find an ‘arrangement of cohabitation’.”
If, in fact, the involved parties fail to make an agreement and Greece does leave the monetary union, it is likely that in the short term the euro will weaken on uncertainty about how the Grexit will be executed. However, the long-term impact on the European currency is likely to be far smaller, given that Greece is a small economy when taken within the EU context of member nations. Further to this, a Grexit may deter anti-austerity populism as it will demonstrate to other member nations that cooperation with Brussels and/or Berlin is central to successful and effective union membership. For Greece, the Grexit would mean that Greek banks and the Greek financial system would suffer—through a significant reduction in ECB support. This would lead to increased instability in the Greek economy, and if Greek bonds were to take a tumble (a historically frequent and likely event) then there would not be a bail-out rescue as there has been in the past, and the Greek economy would have to absorb the losses and suffer from much worse economic downturns. The government would have to implement a number of major structural reforms to effectively guard against this likely risk scenario. In addition, were the unlikely event of the Grexit to occur, Greece might very well turn to Russia as an ally. Mr Tsipras has already indicated that he would like to develop closer ties with Russia; the first foreign ambassador whom Syriza leader Alexis Tsipras met as prime minister was Russia’s envoy. In addition, Mr Tsipras has strongly criticised EU sanctions imposed on Russia for its annexation of Crimea and its involvement in Eastern Ukraine. This political allegiance is not good for alleviating the growing tensions with EU member states.
Although a compromise remains the most likely outcome, the risk of escalation to a Grexit remains significant enough to spook investors. Investor perception is what drives investor confidence, which in turn drives capital and liquidity into the financial system and feeds economic development and growth. If Greek and other European leaders are not able to signal to the markets that they are capable of achieving a sensible and practical agreement, Europe will most likely continue with, if not worsen in, its lacklustre levels of economic performance as experienced over the past few years. Commenting on the fallout for Europe and its currency, Mr Elliott of deVere Group has stated that he believes “the euro will weaken—perhaps to parity with the dollar—over the next six months as investors seek ‘safe havens’ as other populist parties in the Eurozone are likely to rise in the opinion polls and echo Syriza with their demands to end austerity.” On the upside, the weakening euro is making European goods and services more attractive to foreign businesses and consumers, helping boost exports and GDP, further exacerbating the trend set into motion by the recently announced ECB quantitative-easing programme. Mr Elliott has commented on this positive outcome, noting that it is in fact “one of the ironies of the euro crisis…that the more that Greece looks likely to cause problems for the single currency, the more Germany and the core economies benefit from resulting euro weakness.” On the other hand, in the balance of factors and unfortunately in more heavily weighted measure, if agreements and resolutions are not made over the short to medium term with Greece regarding its debt payment then Europe is more likely to see similar policy suggestions and action from other nations in the future—including proposals for debt write-offs and self-serving policies. This is bad news for the EU as it will lead to splintered elements of what is supposed to be a union—creating tensions and turmoil and the destruction of value, rather than efforts towards cooperation, compromise and the creation of improved economic output through free trade and efficiency maximisation. However, further adding uncertainty to the outcome of negotiations is the very nature of the coalition government. Mr Elliott has remarked on the increased market uncertainty stemming from the newly formed coalition government, noting that “despite Europe’s main share markets rising—after initial falls—and the euro recovering somewhat, the announcement that Prime Minister-elect Alexis Tsipras’ main coalition partner is the centre-right Greek Independents will generate more uncertainty, leading to more market turbulence. This is largely because the move will hinder Syriza’s negotiations with the Troika and, I suspect, hinder reform.”
As Mr Tsipras made his first cabinet speech on January 28 in Athens, Greek government bond yields spiked to their highest level since the 2012 debt restructuring, as investor concerns about the anti-austerity coalition’s likeliness to butt heads and clash with international creditors over the foreseeable future mounted. The Athens Stock Exchange also experienced an 8-percent plummet in prices as news emerged that the new government was placing a number of major privatisation projects on hold, including the primary power company, the Public Power Corporation of Greece. Greek 10-year bond yields soared to more than 10 percent, reflecting increased fears that investors may not get their money back if they invest in assets underpinned by a Greek balance sheet. Greece has endured stringent budget cuts in return for its 2010 bailout, negotiated with the Troika—shrinking its economy drastically, with high unemployment and with many Greeks being thrown into poverty. The Greek average wage is €600 ($690, £450) a month, and unemployment is at 25 percent, with youth unemployment at almost 50 percent. Syriza may have increased tensions and uncertainty somewhat on a European scale, but on a domestic policy stance it has outlined a number of measures that will help stimulate economic growth and restore stability to the Greek economic system. Most headline grabbing of all these domestic policies has been that of targeting an improved labour market—creating jobs and boosting wages. The party leader has promised the creation of 300,000 new jobs in the private, public and social sectors, alongside a substantial rise in the minimum monthly wage—from €580 ($658, £433) to €751 ($853, £562). New jobs would target youth unemployment. The party has furthermore outlined plans to reduce energy- and property-related taxes, boost pensions, cut medical costs and a number of additional policies designed to improve social well-being across the nation—a so-called set of “humanitarian policy” measures. However, all of these social benefits come at a cost. Syriza has argued that its plans will cost a total of €11.3 billion, which will be paid for by strategic initiatives, such as a national crackdown on tax evasion and illegal smuggling-based business activity. However, the estimated cost figures proposed by the Syriza party have been broadly disputed by global economic advisers and political experts, market participants as well as, perhaps most relevantly, the previous government, which has the most direct experience in handling these matters for Greece.
It has been only a short time since the outcome of the Greek election was announced, and already debt-restructuring proposals, domestic-policy matters, economic consequences, discussions of a potential Grexit and many more issues have come under the spotlight and taken a number of different turns. The more concerning risk for EU integration going forward may be the growing anti-establishment, radical groups who will seek to capitalise on these tensions. If EU integration policy fails to adjust and evolve to the shifting political landscape, this trend is likely to grow and create wider tensions across the union. Investors, economists, politicians, communities and individuals are awaiting the outcome that has the potential to reach all corners through economic impact and development. In the meantime, uncertainty pervades the marketplace. Mr Elliott further adds, “The changing political landscape in Greece, and across Europe, is presenting numerous risks and opportunities for investors globally. As such, the shifting dynamics must be monitored carefully to be able to benefit from these opportunities and to mitigate the avoidable risks.”
The question remains unanswered as to whether a post-electoral debt crisis can be managed and a Grexit avoided. Mr Tsipras has promised “realistic proposals” for an economic recovery and has vowed to fight corruption and tax evasion through a recovery plan that is aimed at preventing deficits in the future. However, while Syriza may aim to return Greece to prosperity, the immediate risk is that Syriza’s plan for debt relief will be found unacceptable to Troika—confrontation is certainly in the cards. However, financial markets may have overreacted to the possibility of Grexit. The most effective predictor of a successful resolution between Syriza and Troika is that it is in neither side’s best interest to let, or force, a Grexit to occur.