Greek elections and financial market upheavals

Guest Contribution by Marica Frangakis[1]

On 9 December the Greek Prime Minister, Antonis Samaras, called for early presidential elections for December 17. On the same day, the Athens Stock Exchange fell 13 pc, the biggest one-day drop since 1987. Further, yields on 3-year Greek debt exploded by nearly 300 basis points to 9.52 pc, while Italian and Portuguese yields also increased noticeably. What is the underlying rationale of these developments in the financial markets? What is the latest stage in the Greek saga that began in 2010? We shall probe into these questions and try to provide some answers.

According to the Greek constitution, parliament must elect a new president one month before the end of the incumbent’s 5-year term, which in this case ends in March 2015. Following the announcement of early elections, the first presidential vote takes place on 17 December and, if this fails to achieve a majority of 200 (out of 300) members of parliament, the vote will go into a second round on 23 December, again requiring a 200 vote majority. If in the third and final round to take place on 29 December, the present government coalition fails to obtain the lower requirement of 180 votes, snap parliamentary elections will be held by early February 2015.

The probability of the government’s presidential candidate to be elected by the present parliament is slim. This is because the government coalition of the conservatives (New Democracy) and the socialists (PASOK) has 155 seats in the Greek parliament. Thus it needs to convince 25 additional MPs to support its candidate. Although it could co-opt support from other parties and independent MPs, it is unlikely that it will succeed to secure the required quota of 180 votes. Therefore, early parliamentary elections (20 months ahead of schedule) will have to take place. However, why does a legitimate constitutional process cause such a furore in the financial markets? Why has it led to an instant downgrading of Greek government bonds?

The reason is that the main opposition party SYRIZA (Coalition of the Radical Left) is predicted to win the next parliamentary elections. Its appeal to the Greek electorate has been increasing in leaps and bounds since 2009, when it registered 4.9% of the vote in the October elections of that year. For example, in the European parliamentary elections of May 2014, SYRIZA obtained 26.6% of the vote, as compared with New Democracy’s 22.7%. The prospect of a SYRIZA government is unsettling for the financial markets, given that it is highly critical of the ‘cure’ applied to Greece since 2010, which has resulted in five years of depression believed to be ‘longer and deeper than Europe’s worst episodes in the 1930s’.[2]

Brute austerity has been applied in Greece since early 2010, resulting in the shrinking of the economy by almost 30%, as consumption and investment, both private and public, continue to contract, while exports do not make up for the deepening gap in demand. Unemployment has almost trebled reaching 26% of the labour force, hitting especially hard women and the under-25s, while a brain-drain to the US, Canada, Australia, Germany and the UK is taking place, as young, qualified Greeks leave the country in large numbers. Long-term unemployment and poverty are on the rise, making for an explosive situation, as the public services – health and education – have deteriorated irrevocably due to spending cuts.

The prescription of the European Commission, the European Central Bank and the IMF (the Troika) for Greece has failed miserably even on its own terms. In particular, the public debt increased from 109.3% of GDP in 2008 to 174.9% in 2013, in spite of a debt restructuring exercise in 2012, which was however funded by new public borrowing.

The dire economic and social consequences of the failed policies implemented in Greece have led to a political re-ordering of great proportions, as the traditionally large parties – New Democracy and PASOK – have lost in credibility, while SYRIZA is gaining in support. At the same time, the fascist party, Golden Dawn, has grown steadily in popularity over the course of the crisis, obtaining 9% of the vote in the 2014 European elections, in spite of the fact that its leadership is in jail for criminal conduct!

Overall, Greece is at the cross-roads. It is very likely that national elections will be held in early 2015. Should this happen, SYRIZA will most probably be called upon to form a government. This will have to deal with a large number of especially difficult problems, including not only the humanitarian crisis faced by large sections of the population and the collapse of the Greek economy, but also the high financing needs of more than €20 billion (11% of GDP) in 2015.

SYRIZA is committed to renegotiating the deal with the EU and the IMF. It will seek some form of debt relief, so as to halt the downward spiral Greece finds itself in and set the economy back on track. Such a renegotiation may well open the way for a meaningful restructuring of the Eurozone architecture, which has been an integral part of the euro- crisis. The more smoothly this is done, the fewer the repercussions on the financial markets.

Should Greece’s Eurozone partners, however, refuse to enter into such negotiations, this will cause a new wave of speculative betting in the financial markets, destabilizing them yet again and reviving the risk of contagion to other Southern European countries, such as Italy. Furthermore, such a refusal will have severe political repercussions, since it would risk humiliating not only the Greek, but also the European Left, while it would drive greater sections of the population to the far-right in Europe.

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[1] Independent Researcher (frangaki@otenet.gr); Member of the Board of Nicos Poulantzas Institute (www.poulantzas.gr); Member of the Steering Committee of the EuroMemo Group (www.euromemo.eu)

[2] Evans-Prichard, A, 2014, Greek candidate willing to call European leaders’ bluff, The Telegraph, Dec 10