Markets shouldn’t be freaking out about Greek elections

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It’s not surprising that Greek investors would be spooked by the idea of political turmoil that could replace Greece’s center-right coalition government with a radical leftist one as soon as February.Greece Flag Icon

That possibility became much more likely yesterday, when Greek prime minister Antonis Samaras brought forward a presidential election to replace Karolos Papoulias, the 85-year-old incumbent and a founder of PASOK (Panhellenic Socialist Movement – Πανελλήνιο Σοσιαλιστικό Κίνημα), Greece’s traditional center-left party, whose second five-year term was due to expire in March 2015. Greece’s presidency, a chiefly ceremonial office like in many European parliamentary systems, is determined indirectly by the Hellenic Parliament (Βουλή των Ελλήνων), not directly through national elections.

Samaras’s decision only moves up the presidential vote by two months. Samaras leads a coalition government of his own center-right New Democracy (Νέα Δημοκρατία) and its former rival PASOK. If the coalition fails to elect a president, it will trigger the government’s collapse, bringing forward parliamentary elections that would otherwise take place in June 2016.

The prospect of early elections and the possibility that SYRIZA (the Coalition of the Radical Left — Συνασπισμός Ριζοσπαστικής Αριστεράς) and its charismatic leader, Alexis Tsipras (pictured above), could be running Greece’s economic policy within weeks was enough to send the Athens stock exchange tumbling by 12.78% on Tuesday, the largest single-day drop since 1987, as analysts went berserk explaining that a potential SYRIZA victory could spell doom not just to the European but to the global economy:

“Greece in the next 6 weeks may prove to be more important for global markets than Russia/Ukraine was in 2014,” said Charles Robertson, chief economist at Renaissance Capital. “A possible [SYRIZA] election victory may force the eurozone to choose between a fiscal union (debt write off for Greece) or the first Euro exit.”

Though voters might be weary of seven years of economic pain, Greece’s economy is actually growing at one of the highest rates in the eurozone, which is struggling with low growth and deflationary pressure. At a time when most Europeans have reason to be wary of 2015, Greeks should be confident that their economy has bottomed out, and employment and GDP growth should continue to improve in 2015 and beyond. In the long-term perspective, it’s a great time for stronger investment in Greece, not panic and divestment.

There’s reason to believe that Tsipras, once in power, would act responsibly. SYRIZA, and not PASOK, is now the standard bearer of the opposition left in Greece, but Tsipras has moderated some of his more firebrand positions. Though he is arguably the loudest critics of eurozone austerity, he is more solicitous of the investor class today than he’s ever been. Tsipras still wants to restructure Greece’s public debt (still a staggering 174% of GDP) by forcing a renegotiation that could lead to a haircut or other modification. Tsipras and his economic advisers have nevertheless committed a potential SYRIZA government to budget discipline, even while promising to ameliorate the worst of the drastic cuts to social welfare spending required under the terms of Greece’s two bailouts worth €110 billion and €130 billion, respectively, from the ‘troika’ of the European Central Bank, the European Commission and the International Monetary Fund. Reassuringly, however, Tsipras has essentially promised he will not default on Greek debt and he will not attempt to leave the eurozone. 

Tsipiras is probably correct that Greece’s debt burden is not sustainable. He’s also probably right that Brussels and Berlin would cave to renegotiating that debt if the alternative is a return to the ‘Grexit’ speculation and the financial market turmoil of 2012 when the ECB is trying to wage its own fight to expand the central bank’s reflationary ‘quantitative easing’ efforts. The upside for Tsipras, if he wins a new election, is that SYRIZA would likely take credit for Greece’s economic progress just as it’s beginning to emerge from the nadir of its recessionary cycle.

The first round of the election will take place on December 17, with subsequent rounds on December 23 and December 29. In the first two rounds, 200 MPs are required to elect a president, but just 180 are required in the third round, where Samaras might possibly eke out a victory.

Samaras’s own New Democracy holds just 127 seats; with PASOK’s 28 votes, that gives Samaras to just 155 votes. In order to elect a new president, then, he will need to win over at least 25 more votes from among the remaining 145 MPs in the Hellenic Parliament.

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Those votes surely won’t come from SYRIZA, which has been preparing for fresh elections for months. They also won’t come from radicals on either side of the political spectrum, including the Greek Communist Party (KKE) or the neo-fascist Golden Dawn (Χρυσή Αυγή), whose leaders have been increasingly subject to criminal prosecution by the Greek government.

For now, those votes will not come from the Democratic Left (DIMAR, Δημοκρατική Αριστερά), a new social democratic party that initially joined Samaras’s coalition after the last June 2012 elections but which withdrew from the coalition last June over the government’s ongoing austerity measures. DIMAR has already ruled out supporting Samaras’s presidential candidate. So has another small party, the Independent Greeks (ANEL, Ανεξάρτητοι Έλληνες), themselves an anti-austerity spinoff from New Democracy.

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Together with 24 independent MPs, however, ANEL and  DIMAR provide a base of 46 potential votes — and Samaras will only need to win over 25 of them to elect a new president and to keep his government afloat. For now, Samaras has nominated Stavros Dimas (pictured above), a widely respected former European Commissioner for the environment and former Greek foreign minister.

If Dimas fails to win sufficient support on the first and second ballots, however, Samaras could always appoint a new candidate for the vital third round on December 29 who would be more amenable to the independents, ANEL and/or DIMAR. Both ANEL and DIMAR have an incentive to find a deal, because polls show that they will lose much of the support that they won in 2012, especially DIMAR, which is still tainted by association with its participation in government. DIMAR, in particular, is likely to fall below the 3% threshold required for representation in parliament.

If Samaras can’t find a route to 180 votes, there’s a good chance that SYRIZA would win fresh elections. After 2.5 years in government, Greek voters are still exhausted from a six-year recession that’s only showing signs of growth this year, as the country officially exited recession with 0.7% growth in the third quarter of 2014. Though it’s fallen from its high of 28% in late 2013, the unemployment rate is still an incredibly high 25.9%.

If Samaras miscalculates, polls show that SYRIZA would win the next  election by anywhere from a 3% to 9% margin. That’s important because the top party wins a ‘bonus’ of 50 seats. So if SYRIZA tops New Democracy by just one vote, it will reap a huge windfall — one-sixth of the seats in the entire Hellenic Parliament. Though many Greek voters are still undecided about a potential parliamentary election, SYRIZA edged out New Democracy earlier this year in the May European parliamentary elections by a margin of 26.6% to 22.7%, with Golden Dawn finishing in third place.

The presidential vote comes after the troika extended Greece’s bailout for another two months, despite Samaras’s earlier promise to exit the bailout by the end of the year. His pledge spooked bond markets, sending bond yields skyrocketing to 9%, an unsustainable level for any European country, let alone one still essentially on fiscal life support.

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