Framing the Greek elections and post-election negotiations
It is clear that Greece will be unable to hit their deficit targets. According to Die Zeit, Greece is already lagging on tax revenues and privatization proceeds. This is why the German government is already debating relaxing Greece’s austerity targets. So the fact is that the bailout package will have to be renegotiated regardless of what happens in Greek elections. This is a key point missed in the public discussion about the Greek situation. The question regarding the Greek election mostly concerns negotiating position.
UBS has a very good take on this (hat tip FT Alphaville). I suggest you read their short piece in full (link here). They ask ten important questions that Alphaville does a good job of summarising. Here are the questions and answers about the Greek election and a less abbreviated version of the answers than at Alphaville:
- Who’s winning? Too close to call.
- Is the election a vote on Greece’s euro membership? No. As the opinion survey quoted above shows, if the election were a vote on Greece’s euro membership, the party most likely to guarantee this membership would be sure to win.
- Can Greece be out of the eurozone as early as next week? Technically yes, but very unlikely. For Greece to leave the euro area as early as next week a number of prerequisites need to fall into place, the combination of which looks very unlikely to us.
- Will the election remove uncertainty about Greece? No. Media reports (and, admittedly, some research) suggest that after the Greek election, uncertainty will go away and visibility will return. We think this is a wrong perception. Instead, we would expect uncertainty to continue. The reason for our more cautious stance is that we do not expect any clear government formation in the wake of the election (see above).
- What is the ideal election result – from an investor’s perspective? There is a two-step answer to this question. First, there is no ideal outcome because in the immediate aftermath of the election, any possible coalition (if there is one) could potentially announce that it may seek to renegotiate the MOU…Second, there could be a development later on, in which inability to form a coalition leads to a caretaker government.
- Will they pull the plug? The question whether the troika, ie, the EU, the ECB and the IMF, will really stop payments in case of a Syriza win and Mr Tsipras’ refusal to comply with the commitments made in the MOU is very hard to answer. To be honest, so little can be said on this that it would be pure speculation to suggest any potential outcome.
- Can Greece survive once its primary balance is zero? We see several problems here. The first is that Greece is not as close to a balanced primary budget as many think. Since January, when the government started with a EUR6.5bn primary surplus, public finances have deteriorated quite markedly.
- Would Greece be better off without the euro? We believe that whatever the election outcome is and no matter if the country remains a euro member or not, Europeans should know that they will likely need to keep paying for Greece.
- What if there is another post-election deadlock? The bottom line is that, in the event of an unclear election result and no government formed by 26 June (ie, in the nine days following the election), there would probably be a national unity/technocrat government, supported by a coalition of major parties, rather than another round of new elections.
- What’s the medium-term perspective? In the medium term, even if this Sunday does not produce a result which ends up in Greece leaving the euro area, there will be a lot of uncertainty about the country’s euro membership.
We know very little about the likely outcome of this Sunday’s election in Greece. Opinion polls show conflicting results, and can they be trusted at all? There may well have been even more posturing than usual on the part of all parties, especially Syriza and Nea Dimocratia. Voters appear impressed, but may completely change their mind on election day.
The second important conclusion is that, on Monday morning, we will likely still know very little. Even in the rather unlikely event of a straightforward election result, ie, a clear majority for one of the contenders, we would not know what this means for renegotiation of the MOU, which all parties have now announced. There might be even more fog, instead of less, next week.
Lastly, if this election produces an unclear result (which we expect), ends up in some kind of coalition, potentially a technocrat government (which we find likely), but does not produce a Greek exit from the euro area (which is our core scenario), this would not necessarily remove uncertainty around Greece. If anything can be predicted ahead of this election with a reasonable degree of confidence, it is that the Greek tragedy is most likely set to continue.
That really gets to the heart of it.
Look, when the Greek crisis started two years ago I got it wrong, when I said "The Germans will not bail out Greece". Yes I had a weasel clause at the end of the post to be able to qualify that statement. But, the gist of my remarks was that Germany would hold firm and allow Greece to default. That is not at all what has happened and so it is clear to me now that Germany remains committed to the euro but also to their economic paradigm as enshrined in the euro via fiscal probity, no bilateral aid, no central bank support of individual states and price stability. However, the German model is flawed because, as we see now, implementing this has caused Europe to go right up to the edge of crisis. And when I say "the Germans", I really am talking about Germany here and not using this as a euphemism for the creditor nations (i.e. Germany, Austria, Finland and the Netherlands).
The Germans would say that the crisis proves that the stability and growth pact needed more teeth – that if Europe had been more harsh in stopping excessive deficits earlier (in France and Germany as well, as they violated the SGP), we wouldn’t be in this crisis. But this is wrong. Spain and Ireland had budget surpluses before the crisis. It’s not just about budget deficits, it’s about the flawed institutional architecture of the euro zone. Europe simply is ill-equipped for crisis given the strictures that the Germans themselves placed on the single currency.
So the question now is more whether Germany is willing to recognise this and change course. I am saying they cannot and will not because the Germans firmly believe that fiscal discipline and price stability cannot be sacrificed. What will happen then? In my view, post-election we will get a negotiation between the new Greek government and the Troika over how to amend the memorandum guiding the terms of Greek aid because Greece is not going to make its targets. All negotiations are mechanisms to split the benefits of mutually acceptable outcomes. This particular negotiation will be driven by each party’s best alternative to a negotiated agreement (BATNA), each party’s set of interests and the relative importance of each party’s interests.
Right now, PASOK and New Democracy have signalled to the Germans that they have no good BATNA – that a Greek exit would be catastrophic. Their negotiating position is weak. Syriza has said that they will not accept the German negotiating position and that they will fight for the spoils of the negotiated outcome on behalf of the Greek people against foreign and domestic bank creditors. But they too have said that a Greek exit would be catastrophic. The difference is they are also saying that a Greek exit would be catastrophic for Germany and the euro too and so they are willing to fall back on this BATNA if push comes to shove. This is a superior negotiating position for Greece if Syriza are willing to negotiate a deal acceptable to Germany and spilt the benefits of a mutually acceptable outcome. We don’t know if they are, though we already know that the Germans are willing to negotiate based on the Die Zeit report. So we will just have to wait and see how much the eventual Greek government is willing to move.