While clearly dramatic, the outcome of the French presidential election was very much anticipated and at this point the only real question is how many promises will Hollande reneg on before the week is over: if Berlusconi is any indication, all it will take is for OAT yields to spike by 20-30% and all shall be well for the status quo. Greece, on the other hand, where as we said the people have lost everything so are free to do anything, just did more or less that, and have shocked Europe with an outcome which as we warned could result in the lack of a pro-bailout coalition government, which means no IMF aid, which means "no bailout for the Greek people", which means no bailout for European banks under the guise of a Greek DIP loan. And with 63% of precincts reporting, ND + Pasok have 153 as of this moment which is enough for a majority although paradoxically the anti-bailout parties will have among them nearly 60% of the finaly vote which means they could form an anti-bailout coalition if they buried their diferences. Finally, there is still time, so for all those curious if the two Greek parties will be able to form an all important coalition government, can keep track of the vote count in real time at the link below.
Finally, while much of what happens next will be as we expected last night, here again is Goldman with their just released largely bearish piece on why futures are currently having an epileptic fit.
Greece Elections: Higher Risk for An Interruption of the Adjustment Program
According to the first official results, the election outcome in Greece creates significant uncertainty ahead for the country primarily and the broader spectrum of Euro-area assets. There is still a margin of error around the results and it is likely that they change throughout the night. But according to the official results at hand:
- It is unclear whether the first party New Democracy and (what appears to be the third party) PASOK occupy enough seats in the parliament to form a majority (jointly accounting for roughly 35.5% of the vote).
- Even if they do, they will do so with a marginal vote share and they may need more parties to join in, in order to form a broader coalition government.
- The "radical left" (SYRIZA), with its clear anti-austerity agenda (but not an anti Europe agenda), is the second party in terms of votes and becomes a key “power-broker” among the anti-austerity powers of the left and the right (radical left accounts for 16.5% of the vote roughly).
- Parties of the far right (Independent Greeks and Golden Dawn) appear to occupy a large portion of the next parliament jointly (counting for more than 15% of the vote).
Tomorrow, the president of the Hellenic Republic (president Papoulias) will ask from the leader of New Democracy (Samaras) to make enquiries across parties to form a coalition government. The leader of PASOK (Venizelos) has stated that narrow majority coalitions are not a preferred solution, therefore it is likely that this enquiry will need to involve other parties too. Failure to reach an agreement along those lines will force the president to ask from the radical left to explore coalitions (which would need to have an anti austerity agenda). If no agreement is reached then we will likely head for an election repeat soon.
The foggy political situation in Greece stands in stark contrast to the immediate decisions that need to be taken in the next two months. As we mentioned in our Friday note (European Views: A Preview of Greece Elections), for the next government, we believe:
- A decision will need to be made for the Greek international-law bond maturing on the 15th of May the owners of which have held out from the PSI process. The outstanding notional is not large (about EUR430mn) but the broader implications of a no-payment decision are unknown.
- Second, by June, budget cuts worth about 11.5bn EUR for the rest of the program period will need to be specified. There is little room left in the budget to promote such an adjustment without affecting public sector wages and pensions. Beyond the funds for PSI and for a partial recapitalization of the banking system, the rest of the funds from the second package remain undisbursed. Undisbursed funds for 7bn EUR worth of arrears (roughly speaking) and for the primary position of Greece will be important for the domestic economy.
- Third, pressure from international lenders will likely shift on product market reforms going forward. This implies a focus on privatizations, opening up closed professions, reducing barriers to entry for new enterprises, reducing assured profit margins for various sectors etc. This is a crucial part of the recovery process for Greece and stalling those would likely deepen the recession.
- Fourth and final, the recapitalization of the banking system in a format that makes it easy for banks to attract private capital in the future needs to move forward in a short time-span to safeguard financial stability.
In short, while incentives are still in place for mainline Greek political forces to avoid extreme solutions that would lead to an interruption in the Greek rescue package, the risk is that lack of coordination and the prevalence of populist agendas in the parliament could potentially lead to the less desired scenario. The latest budget data shows that Greece may be running a flat-ish primary budget position, which may reduce the consequences if such risk were to occur. That said, it becomes hard to assess the hit in confidence and the financial turbulence involved in such a scenario. In addition, the failure to pay the arrears will be an additional source of shock for public sector corporations. Finally, the results could further estrange Greece from the core of Europe.