Trouble in Greece Never Left

The Greek government has made several economic and political gambles in 2014 that are now putting the country back on MNCs’ map of concerns. Financial markets have already reacted to news of an impending presidential election, with the Athens Stock Exchange losing 12.8% (the largest single-day fall since its crash of 1987), and bond yields higher by nearly a full percentage point at 8.2%. Companies should re-consider their borrowing costs in Greece for themselves and for their partners ahead of what is likely to be a volatile spring for business in the country.

Throughout the year, news media have treated the Greek return to international bond markets, and its attempts to leave bailout, as positive measures reinforcing Greek recovery. Indeed, the Greek economy has left recession for the first time in 6 years, and is forecast to grow by 1.4% in 2015. However, bond markets are quick to forget the strides that the country has made toward more sustainable growth, and the Greek government’s gambles could prove to be very costly. While many companies have ring-fenced Greece from their operations, the country’s exit from recession has brought it back into consideration for investment. More importantly, while Spanish and Italian bond yields have reacted only very modestly to the trouble within their neighbor’s borders, a financial market panic in Greece could increase their borrowing costs as well, threatening budgets across southern Europe.

On Tuesday, Prime Minister Antonis Samaras called a snap presidential election for December 17th, with the final vote to take place on December 29th. He did so as an attempt to end weeks of political uncertainty which have increased the government’s borrowing costs and damaged confidence in the country’s recovery. The parliament, rather than the general population, elects its president. A successful re-election of a coalition head of government would give Samaras another year to finish his four-year term, and a chance to keep Greece on its path to sustainable growth.

The move, however, is risky. Samaras’ center-right New Democracy party and its socialist coalition partner Pasok hold 155 of the 300 seats in parliament, and they need 180 to win the elections. They can expect the support of 16 or 17 independent members, but will have a very difficult time gaining the remaining 8 or 9 votes needed to seal a deal. If Samaras is unable to gain those 180 seats, then snap parliamentary elections will be called. With left-wing coalition SYRIZA leading by 3.0% in the polls, Greece’s economy could be in for a major change as a result.

Underlying the election decision is the politics of Greece’s bailout.  Samaras has been increasingly frustrated by the country’s troika of lenders and their moving of goalposts for the country to exit its bailout. Where the government claims massive budget progress made, the troika doubts the government’s figures and assumes holes in the budget that could destroy the government’s credibility if found later and without bailout protection.

There is a 60% chance that Greece will need a new parliamentary election. With SYRIZA in the lead, that’s a big risk for bondholders. The insurgent party wants Greece’s creditors to take a major haircut (dramatically cutting the value of their investment), and for existing bailout programs to be canceled. SYRIZA’s leader, Alexis Tsipras, is working very hard not to worry undecided Greek voters. Although his approval ratings are about as high as those of Samaras, moderates are worried that ending payments on Greece’s debt could provoke a standoff with lenders that would prompt a bank run and even the loss of their deposits.

Greece is thus, once again, hanging by a thread.


FSG clients can read our Western Europe Monthly Market Monitor, where we warned about imminent snap elections in Greece.

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