EC Syriza’s Victory Is Not The End But The Beginning

As the demonizing of Syriza gives way to post-electoral analysis, its victory is being seen as anti-austerity not anti-EMU. Politics makes for strange bedfellows, and a small conservative party, Independent Greeks, have agreed in principle to form a coalition. The period of political uncertainty that was a clear risk will not materialize, and a new government will be sworn quickly.  

This in turn will maximize the period for negotiations with Greece’s official creditors. The current support package was extended from December to the end of February. A new agreement is needed going forward. Otherwise, the funding of Greek banks becomes questionable as the ECB has indicated that without an agreement, it could not longer accept Greek government bonds as collateral. In addition, Greece has a 4.3 bln euro payment due in March. Another chunky payment of 6.5 bln euros are due in the July-August period. All told; some 28 bln euros are due this year and next.   

A key takeaway is the austerity regime over the last several years is producing social and political tensions that are pushing back. Greece may be the proverbial canary in the coalmine.  Until now push back was dominated by populist right parties. Syriza’s victory will embolden Podemos in Spain. Spanish bonds are under-performing a bit today though we would not want to exaggerate that.   

Italy’s presidential election process will begin towards the end of the week. Prime Minister Renzi may compromise with Berlusconi (after the third round) in order, so the argument goes, to maintain support for his reform agenda. It is unlikely to be as dramatic as events in Greece. We note that the two main opposition parties in Italy claim they want to leave monetary union.  

In the run-up to the election, we have argued that talk of a Grexit was bombastic.  Nor do we think a default is particularly likely. We have argued that there is plenty of room to reach an agreement. In fact, for the last couple of years, following the restructuring of debt in private hands, the official sector has indicated a willingness to lighten Greece’s debt servicing costs provided the country complete is commitments under the memorandum of understanding.