Greece: Next Steps

The Greek elections culminated with the worst possible outcome: 2 votes short of a majority for the pro-bailout New Democracy and Pasok parties. So what happens next? Well - two things: expect to see random stop hunting ramps in the EURUSD and ES on false rumors that despite the math, a pro-bailout coalition government is being formed. It isn't, but it will take out all FX and ES stops to the upside first as skittish shorts get burned as usual on planted fake headlines. More importantly, and as predicted last week, we will likely see yet another Greek election as the political vacuum in Athens is likely too big to be circumvented in a few days. Below we present a summary of immediate next steps as summarized by the WSJ. Yet one thing we want to bring attention to is that as we pointed out first on Saturday, a key even over the next two weeks, during a time when Greece will most likely not have an active government in place is the May 15th maturity of €430 million in international-law bonds whose holders have not agreed to the terms of the PSI and thus demand full payment... of money that Greece does not have. Finally we already know that Norway is the biggest non-PSI compliant entity out there. So will we finally see the first Greek PSI-related lawsuit on May 16 if and when Greece fails to make a payment? We will know in 9 days whether the European soap opera gets even more exciting than usual as various European countries start suing each other in international court, especially when one of the countries will have no government for the foreseeable future.

From the WSJ:

TIMELINE: This is what the next few days will look like.

  • May 7-May 9: New Democracy’s Antonis Samaras seeks coalition government
  • May 10-May 12: Syriza’s Alexis Tsipras tries his hand at building coalition if Samaras fails
  • May 13- May 15: If both have failed, Pasok’s Evangelos Venizelos gets the mandate to start coalition talks
  • May 16: President of the Republic invites leaders of the seven parties that have made it into parliament in final effort to cobble together coaltiion.
  • May 16 or soon after: If that final effort fails, a caretaker government is appointed t o lead the country to elections.
  • June 10: Is the earliest date that fresh elections can be held if all previous steps have failed.
  • June 30: Deadline by which Greek parliament must approve €11.5 billion in further cutbacks to deal with expected budget gaps in 2013 and 2014 under its bailout plan agreed with the Troika of its international lenders.

Until a new government is formed and a new prime minister sworn in, Lucas Papademos, Greece’s technocrat caretaker prime minister will remain in his position. However, Papademos’ government cannot legislate as parliament was dissolved ahead of the elections.

And in detail:

THE MANDATE: Antonis Samaras today will receive a so-called exploratory mandate from President of the Republic Karolos Papoulias, whose role is largely ceremonial. This means he has three days to form a government. Mr. Samaras yesterday invited “all pro-European parties” to unite forces under his leadership to “keep the country in the euro” and “modify” the economic policies attached to Greece’s bailout program. That implies he’s likely to hold talks with most parties that have made it into parliament, apart from the neo-nazi Golden Dawn and the Communists who are both categorically anti-Europe.


If Mr.  Samaras fails, the president will call on Alexis Tsipras, leader of Syriza, to try and form a government. Mr. Tsipras had called upon all left-wing parties to join forces before the election and will do so again now. In his address on Sunday evening following the results, he said he would do the same when the exploratory mandate reached his hands. He too will have three days to build a government.


If Mr. Tsipras fails, the exercise will be repeated by Evangelos Venizelos, the leader of socialist Pasok, which was the winner of the 2009 election and the party that oversaw the country’s bailout program and its debt restructuring. Mr. Venizelos Sunday said he too wanted a pro-Europe coalition.


If none of the three is able to form a coalition government, the president will call the leaders of all the parties in parliament together for one last stab at a cross-party coalition. But if that fails, too, the president and the party leaders are tasked with cobbling together a caretaker government that will lead the country to fresh elections.


If the party leaders can’t even agree on a caretaker prime minister (this has happened once before, in 1989) the president appoints the chief justice of either Greece’s Supreme Administrative Court, the Supreme Court, or the Court of Audits, to take the reins and lead the country to elections.

However in all of this, pay particular attention to May 15. This is what we said previously:

Unlike Belgium, it is unlikely that Greece can persist under anarchy, especially with another critical event coming due: a €430 million payment on an international law bond that matures on May 15, and whose owners have held out from the PSI process (remember that? apparently not all has been swept under the rug). In fact we now know that the Norwegian sovereign wealth fund could very well be the entity that will demand payment and when it doesn't get it will promptly proceed to sue Greece.

And a good just issued summary from Peter Tchir on precisely this issue:

In a world full of unintended consequences (where unintended invariably means bad) the profile of the Greece’s debt is interesting.


Greece currently has €220 billion of debt outstanding.  That will grow as part of the “bail-out” but since the bank recapitalization isn’t done, and other money has been held back, the amount is smaller than the final projected amounts.


Troika loans are about €77 billion of this amount.  These loans have stricter language and will be hard for Greece to do much about. 


Of the €142 billion in bonds, at least €50 billion are the ECB’s holdings (remember, they have been getting paid off on bonds as they mature).  This amount should draw the attention of the newly elected Greek government.  While the Troika loans may be tough to walk away from, these bonds, held as part of an ill-advised secondary market purchase program would be a nice target for more debt reduction.  In fact, it looks like over €3 billion is due to go to the ECB this month.  Think about that.  This newly elected government has to borrow €3 billion from the ECB to pay back the ECB? 


It has to be tempting to renegotiate with the ECB and make them take some share of the losses (especially since they have been earning interest, getting paid par on bonds already matured, and didn’t pay par for these bonds in the first place). This disagreement between Greece and the ECB is why the ECB has not been involved lately in the secondary markets recently, and why that role is being pushed onto the EFSF and ESM (if and when that is implemented).  Watch this.


Of the €90 billion or so of private sector held bonds, the €450 million due on May 15th are particularly interesting to watch.  An actual default on these could lead us right back to the “disorderly” default scenario that so many people were afraid of.  Although I don’t think a default would be a disaster, much of the market thinks it would, so I suspect Greece will pay off these holders.  The next maturity isn’t until June 2013, so I’m guessing all parties will suck it up and pay these holders out so they can put off more decisions for a bit. What that does to the game theory analysis when other countries start their own PSI, I have no idea, but suspect it doesn’t make it easier for countries to achieve their goals.