As Greek Bonds Top 12%, What Happens Next?

Greek stocks are down over 8% (and were worse) back to more than 2-year lows (as banking stocks are massacred) and 3Y bond yields are back over 12% (post-bailout highs) following Samaras' 3rd failed attempt to avoid a snap-election and all the GREXIT possibilities that brings. So, what happens next?

Not Good...


And the Greek curve is now massively inverted as ECB QE momo muppets rush for the exits at the short-end...


Not-er Good...


As Open Europe explains,

What happens in Greece now?

The government’s candidate for President, Stavros Dimas, gained only 168 votes – well short of the 180 he needed and no further improvement on the previous round.

The Greek parliament will be dissolved and snap elections called. The parliament must be dissolved within 10 days, while Greek Prime Minister Antonis Samaras has already said he will ask for the snap elections to be held on 25 January (must take place within 30 days and on a Sunday). As we previously noted on this blog, things will probably get worse in Greece before they get better.

Has anyone gained from this saga?

The recent polls have shown that the governing New Democracy have closed the gap somewhat on SYRIZA. An Alco poll for Proto Thema released on Saturday put SYRIZA on 28.3%, New Democracy on 25%, Golden Dawn on 5.2%, PASOK on 4.6%, To Potami on 4.4%, the Greek Communist Party on 4.2%, and the Independent Greeks on 3%. Previous polls had put the gap between the top two parties at almost eight percentage points.

In general, it is clear that there are concerns around SYRIZA’s ability to govern and what exactly they will do when in power. They have said they will renegotiate the Greek bailout and push for a debt restructuring, however, it is far from clear what they will do if they do not get what they want or how hard they will push back against other eurozone countries unwillingness to take such action. Much of the market uncertainty – Greek borrowing costs have risen and the stock market has fallen sharply – can be attributed to markets trying to price this political uncertainty.

That said, New Democracy has also not come out of this unscathed. Greek Prime Minister Antonis Samaras has looked weakened by this saga. He has continuously warned that snap elections could provoke a new crisis in Greece. While these warnings seem valid, some believe his approach has verged on scaremongering. The extent he has pushed back against elections has also at times verged on a dismissal of democracy and the democratic process.

PASOK, the Greek Socialist Party, seems to be the biggest loser. Currently part of the governing coalition with 28 MPs in the Greek parliament, in new elections the support for the party could fall to between 3% and 5% – leaving it with around 15 MPs in the new parliament.

How might a new Greek government look?

As the graph below shows (based on the poll cited above), it is unlikely that any party will have a clear majority in the new parliament, even with the 50 seat bonus given to the most voted party. This means SYRIZA would have to find a coalition partner.

Recent polling by Alco for Proto Thema suggests that no party will command an absolute majority of seats in the new Greek Parliament following snap elections, although SYRIZA will likely be the largest party.

However, there are few obvious candidates. SYRIZA has been at loggerheads with the current governing parties so some form of grand coalition seems very unlikely. At the moment, the most likely candidate is To Potami – a new party formed earlier this year which should gain a decent number of seats. They are meant to be a centrist party (its short lifespan makes it hard to judge conclusively), so this could help balance out concerns over SYRIZA’s more radical factions. However, there seems to be little love lost between the parties’ two leaders, so striking a deal could prove tricky.

All this raises the question of whether we could have a replay of the 2012 elections where the first general election failed to yield a stable governing coalition meaning another round of elections is needed.

What does this mean for the Greek economy?

A huge amount of uncertainty.

Firstly, questions will be raised about whether Greece can meet the conditions of its recent bailout extension. The deal allowed the country an extra two months to complete some further reforms and for the EU/IMF/ECB Troika to complete its current bailout review. However, the first two weeks of this period have been spent on the presidential vote – little time has been spent taking action. Now the parliament is to be dissolved, meaning that nothing can happen for at least a month or six weeks – and certainly no new legislation can be passed. Some work will continue behind the scenes, but with the political establishment in full election mode, minds will be elsewhere. Furthermore, the landscape could fundamentally change after the elections, providing an excuse to delay any radical reforms.

Secondly, the new government will have to negotiate a process for exiting the current bailout and filling Greece’s funding gap over the next few years – likely to be double digit billions. The window to work in here is small meaning the pressure will be on, reducing the room for manoeuvre. With the bailout finishing at the end of February the new government will have little time to secure a deal or face cash shortages in the following months. The negotiations over the future role of the IMF will be particularly fraught, with many in Greece keen to see them leave but with eurozone partners wanting the funds involvement to continue. Fundamentally, Greece and the Eurozone will have to face up to the question of debt restructuring for the first time in two years – an issue many incorrectly thought had been put to bed.

Thirdly, the new Greek parliament will still have to elect a new President. This can take more or less time depending on how solid the new government is. However, after the new Greek parliament takes office, the rules to elect the new President will become less strict – meaning that even a relative majority of MPs would be enough in a potential third round.

What does this mean for the Eurozone?

It has once again been clear from this episode that financial market jitters in Greece are now largely contained, there has been little to no spill over into other Eurozone countries.

That said, what happens in Greece could have important implications. If SYRIZA come to power, many could see it as a dry run for what might happen in the Spanish elections due at the end of 2015, in which Podemos are expected to make huge gains and possibly be the largest party. Similarly, SYRIZA are seen by many as the template which a number of populist/anti-austerity parties are trying to follow. This is driven home by the fact that Pablo Iglesias, the leader of Spain’s anti-establishment party Podemos, tweeted the following earlier today, “2015 will be the year of change in Spain and Europe. We will start from Greece. Come on, Alexis! Come on, SYRIZA!”.

The negotiations over Greece’s debt will also be seen a precedent. Any deal or restructuring offered to Greece may have to be offered to other countries, particularly those who took bailouts and have very high debt levels (both Ireland and Portugal qualify). The conditionality will also be scrutinised, particularly at a time when France and Italy are pushing back against the strict reform and fiscal consolidation criteria. Any additional room given to Greece will be noted and demanded by other eurozone states. As has often been the case, Greece may once again become a testing ground for the next round of Eurozone crisis policies.