With more than 95% of the votes in Greece’s parliamentary election counted as of the time of writing, Greece’s far-left Syriza led by Alexis Tsipras was already certain to have won a decisive victory.
Although this is not certain yet as we type this, the chart above suggests that Syriza may well have attained an absolute majority in terms of parliamentary seats (the winning party automatically gets an additional 50 seats in Greece’s 300 seat parliament).
Whether or not Syriza has an absolute majority in parliament, it will definitely form the next government, as it has already clinched a coalition deal with the small Independent Greeks party (ironically, a centre-right party that has broken away from Antonis Samaras’ New Democracy party, but is united with Syriza in its opposition to the bailout and austerity package). However, should Syriza turn out to be able to govern without a junior partner, there is a good chance that the more radical elements in the party (which itself is a hodge-podge coalition of various leftist parties) will gain greater influence over the new government’s policies.
This is not unimportant, as we have pointed out previously (see: “Grexitology, a Mexican Standoff” for details). While Syriza’s leadership has reportedly backed away from the threat of just “tearing up the bailout agreement”, this is definitely not a stance supported by everyone in the party. Syriza is the most left-wing party to attain political power in Europe since WW2 and the leader of its left-most wing, Panagiotis Lafazanis, is on record for stating the following:
“We want to exit the euro and a complete break with the totalitarian EU.”
If Syriza is forced to form a coalition, more moderate views are likely to prevail, not least because the Greek government doesn’t exactly have a great many choices given its fiscal condition, regardless of who runs it. Keep in mind that said condition is closely intertwined with that of the country’s banking system, which serves as one of the main conduits for funding the government whenever bailout tranches are late due to disagreements with the “troika”. Ahead of the election, the four largest Greek banks were already faced with a “mini-run” on deposits and all of them applied preemptively for ELA (emergency liquidity assistance). It is up to the ECB council whether such assistance is granted or not.
The left-wingers in the party may well overestimate the fiscal leeway the government would enjoy in the event of an outright default. Given that the government currently runs a primary surplus, it theoretically won’t require outside financing if it ceases to service its debt. However, since Syriza inter alia plans to rescind the property tax introduced by the previous government and intends to vastly increase government spending, the primary surplus could prove ephemeral. Needless to say, if the party’s militant left wing were to get its way, what little investment activity there is would dry up as well and capital flight would accelerate. As of the end of 2013, government spending had already reached a record 59% of GDP (we were unable to find more up to date figures):
This is not to say that Syriza and the Independent Greeks are incorrect in stating that repayment of the government’s mountainous debt burden is effectively impossible. It never made any sense to prevent a debt restructuring (i.e., an outright default) and replace it with an extend-and-pretend scheme courtesy of EU taxpayers. While this scheme makes it appear as though the debt still has some value, it cannot alter the reality of the situation.
Alexis Tsipras insists that he wants to retain the euro, but that actually rules out a unilateral default. It remains unclear to us how Tsipras can possibly deliver on his election promises and retain Greece’s euro membership. Admonishments were already uttered by creditors in the wake of Syriza’s victory, as the WSJ reports:
“Within minutes of the close of the polls, Germany’s powerful central-bank chief, Jens Weidmann, pushed back. “It is clear that Greece will remain dependent on support and it’s also clear that this aid will be provided only when it is in an aid program,” he said in an interview with television broadcaster ARD.
A message on U.K. Prime Minister David Cameron’s usual Twitter account, meanwhile, warned that the Greek result will “increase economic uncertainty across Europe.”
Exiting the euro can be done of course (technically, it would be similar to joining it, only in reverse), but such an exit would be a major headache, not least due to the private sector’s euro-denominated external debt. Obviously, devaluation would not magically create prosperity, and the government would eventually be greatly tempted to fund itself with the printing press in order to pay for all its promises.
The Syriza-led government will likely be able to get some concessions from the EU regarding the bailout terms – but there is a limit to those, since other countries that have been bailed out would otherwise make similar demands. It seems highly unlikely that such concessions would be sufficient to allow Syriza to implement everything it has promised.
Beyond Syriza – More Political Earthquakes Are Likely in Store
However, Syriza’s election victory is only a small part of the European puzzle. If Greece were to default and exit the euro, the greatest hit would be taken by taxpayers elsewhere in the EU, as about €250 billion, or 80% of the outstanding Greek government debt are now in the hands of public lenders, which have financed the bulk of Greece’s debt rollovers since 2011. European banks outside of Greece, although they remain in questionable shape overall, would be unlikely to suffer a mortal blow due to a Greek default (although a lot of private sector debt would likely have to be written off).
More important is though what Syriza’s victory may mean to developments elsewhere in Europe. On January 22, Alexis Tsipras posted the following message on Twitter:
Alexis Tsipras and Podemos leader Pablo Iglesias share a stage at a pre-election Syriza rally
A recent poll in Spain (from January 9) shows that Podemos is establishing a lead equal to that Syriza enjoyed in Greece about a year ago. And yes, there will be elections in Spain later this year. Presumably the victory of Syriza has further invigorated support for Podemos, but there is of course a chance that it could eventually end up undermining it, depending on what Syriza does once it begins to govern.
In this recent poll, Podemos is shown to have a lead over prime minster Rajoy’s party similar to that enjoyed by Syriza over New Democracy about a year ago.
Other recent polls in Spain show an even bigger lead, with Podemos supported by more than 28% of the electorate. This is notwithstanding the fact that its leadership team includes one Juan Carlos Monedero, a former advisor to Hugo Chavez (former advisors to the socialist governments of Bolivia and Ecuador are included as well). Venezuela is of course a well-known socialist success story, with its collapsing currency, spiraling inflation, sharp rise in crime and growing shortages of goods after many years of increasing government regimentation of the economy. While Monedero denies that he wants to replicate the Venezuelan model in Spain, it is worth noting that he advised Chavez for a full nine years, so one must assume he is not opposed to Venezuela style socialism in principle.
Not only far left wing parties are gaining ground in Europe. In France, a poll conducted last November showed that the leader of the Front National, Marine Le Pen would win the first round of a presidential election, regardless of who her opponents are, and she would win the second round as well if she were to face off against Mr. Hollande.
Ms. Le Pen is on record for wanting a French exit from the euro. Not only that, her economic policies have a heavily mercantilistic slant and appear to be oriented along the lines of the “economic autarky” so beloved by nationalist parties throughout history. Among Europe’s “protest parties”, only UKIP in the UK seems to unequivocally support free market principles and free trade – but the UK is not directly relevant for the euro. France’s 10 year government bond currently yields a mere 0.55%, an all time low. In Spain, 10 year yields are just below 1.35%, likewise an all time low. Investors are extremely complacent and are evidently counting on the ECB taking these bonds off their hands regardless of how absurdly they are priced.
It remains to be seen if this complacency will continue to prevail after Syriza’s victory. That seems actually unlikely, especially if the trends evident in voter polls elsewhere in Europe continue.
Waiting in the wings in France: Marine Le Pen, leader of the Front National
Photo credit: Martin Bureau/AFP
The yields on euro area government bonds are of course reflecting the recent collapse in inflation expectations as well. They are probably also indicative of continued distrust of the banking system, as big depositors run the risk of being “bailed in” from 2016 onward in the event of bank failures (in some countries already from 2015) as a result of the EU’s Bank Recovery and Resolution Directive. There is also a sizable element of speculation in the bond markets and banks have a strong incentive to hold government bonds as they aren’t required to set any capital aside for these holdings (according to Basel III regulations, government bonds are considered “risk free”). Lastly, banks also need to hold a certain inventory of government bonds because they need them as collateral in repo transactions.
Nevertheless, it is clear that no risk premium whatsoever is imbedded in euro area government bonds at this juncture (Greek bonds are an exception) – in spite of the fact that the debt situation of almost all European governments has continued to worsen. So far, only Germany has managed to lower its debt-to-GDP ratio slightly. Even in the face of the ECB’s sovereign bond QE announcement this seems extraordinarily nonchalant.
It has long been obvious that the euro area’s economic downturn would eventually result in voters kicking out established parties in some of the countries worst affected by the bust and the austerity policies imposed by the EU and trying their luck with different snake oil salesmen. We’d be enthusiastic about this development, if not for the fact that a great many of the parties attracting the protest vote are either Marxists or extreme nationalists.
Market participants have so far shown unbridled faith in central banks, and risk premiums for risk assets have collapsed to unprecedented levels (neither stocks nor bonds have ever been more overvalued in Europe than they are now).
However, the first cracks in the dam have already appeared with the SNB’s abandonment of the CHF-euro peg. Meanwhile, the political risk posed by parties like Syriza, Podemos, the Front National and others has been completely ignored by investors so far. Only the currency markets and lately also the gold market seem to be expressing a modicum of concern over central bank policies and political developments, but this is widely viewed as an intended outcome. The probability that the happy consensus will receive an unwelcome jolt seems currently higher than at any time since 2011.
Charts by: BigCharts, Cadena Ser, WSJ/Mega TV, Tradingeconomics