Monday, January 26, 2015

A Political Earthquake in Greece?

Nick Squires of the Telegraph report, Greeks hand stunning victory to anti-austerity Syriza:
Greece set itself on a collision course with the rest of Europe on Sunday night after handing a stunning general election victory to a far-Left party that has pledged to reject austerity and cancel the country’s billions of pounds in debt.

In a resounding response to the country’s loss of financial sovereignty, Greeks gave Syriza 36.5 percent of the vote, according to the first official projections.

It will be able to send between 149 and 151 MPs to the 300-seat parliament, tantalisingly close to a majority.

The final result was too close to call but if the party wins 150 seats or fewer, it will have to form a coalition-- possibly with the Independent Greeks, a Right-wing party that also opposes the international bailout. (note: they did forma coalition, see below).

New Democracy, the conservative party which had governed since 2012, won just 27.7 per cent of the vote.

Led by the charismatic former communist Alexis Tsipras, 40, Syriza is now likely to form Europe's first anti-austerity government. The party, a motley collection of communists, Maoists and socialists, wants to cancel a large part of Greece's 320 billion euros of debt, which at more than 175 percent of GDP is proportionally the world's second-highest after Japan.

The debt is equivalent to nearly 30,000 euros for each Greek citizen.

Antonis Samaras, the outgoing prime minister, gave a brief statement in which he accepted the result and claimed he had put Greece back on the road to recovery.

"The Greek people have spoken and we all respect that decision," he said.

"I took charge of the country when it was on the edge of a cliff. I was asked to take burning coals into my hands and I did it. We avoided the worst, we re-established the credibility and prestige of our country."

He said: "We made some mistakes, but we averted the worst. I have a clear conscience because I told the truth to the Greek people right to the end."

The election victory threatens renewed turmoil in global markets and throws Greece's continued membership of the euro zone into question.

All eyes will be on the opening of world financial markets, although fears of a "Grexit" - Greece having to leave the euro - and a potential collapse of the currency have been less fraught than during Greece's last general election in 2012.

Mr Tsipras, an admirer of Che Guevara, has toned down the anti-euro rhetoric he used then and now insists he wants Greece to stay in the euro zone.

Austerity policies imposed by the EU and International Monetary Fund have produced deep suffering, with the economy contracting by a quarter, youth unemployment rising to 50 per cent and 200,000 Greeks leaving the country.

Mr Tsipras has pledged to reverse many of the reforms that the hated “troika” of the EU, IMF and European Central Bank have imposed, including privatisations of state assets, cuts to pensions and a reduction of the minimum wage.

But the creditors have insisted they will hold Greece to account and expect it to stick to its austerity programmes, heralding a potentially explosive showdown.

Greece has enough money to meet its immediate funding needs for the next couple of months but it faces around 10 billion euros of debt repayments over the summer.

Without fresh cash, it will be unable to meet the payments, raising the spectre of an exit from the euro.

The election result will reverberate in countries such as Italy, Spain and Portugal, where the rejection of German-inspired austerity is also growing.

“What’s clear is we have a historic victory that sends a message that does not only concern the Greek people, but all European peoples,” said Panos Skourletis, Syriza’s spokesman. “There is great relief among all Europeans.”

He said the election result was a rejection of “wild austerity” and would herald “a return of social dignity and social justice”.

The Syriza victory was quickly seized on by the European Left as a sign of hope.

Gianni Pittella, an Italian MEP and the head of the Social Democrats in the European Parliament, said: “The Greek people have clearly chosen to break with the austerity imposed on them by the troika’s diktats and to ask the new government to bring in fair policies with more social justice.

“The renegotiation of the Greek debt, and in particular the extension of the terms of its bailout, should no more be considered as a taboo.”

The head of Spain’s similar anti-austerity party, Podemos, also hailed Syriza’s victory.

“Hope is coming, fear is fleeing. Syriza, Podemos, we will win,” said Pablo Iglesias, who last Thursday joined Mr Tsipras at Syriza’s final election rally in Athens.

“In Greece tonight, we are already hearing that. We are hoping we will hear the same thing in Spain soon,” he told a gathering of about 8,000 party faithful in Valencia.

“Syriza winning an outright majority is huge for Europe, an earthquake,” Costas Douzinas, a political commentator and a professor of law at the University of London, told The Telegraph in Athens.

“If a tiny country like Greece can stand up to the lenders and achieve even a small haircut of the debt, the message to the Spanish, Portuguese and Italians will be that they too can stand up at some point.”

“The theory of austerity was a kind of black magic. It was the idea that if you bleed a person, like they did with leeches in the Middle Ages, then they will get better. But the patient is bleeding to death.

“Paying back debt that is 180 per cent of GDP is just not viable. Ninety per cent of the bailout money is paid back to the lenders. It’s like borrowing on Visa to pay Mastercard. The debt just keeps increasing. The situation is absurd.” The election result will only cement the growing rift between Europe’s north and south over austerity and growth.

Before the official results were even announced, there were stern warnings from Berlin that a rejection of fiscal austerity would not be tolerated by Europe’s economic powerhouse.

“I hope the new government won’t call into question what is expected and what has already been achieved,” said Jens Weidmann, the president of the Bundesbank.

Greece would only continue to get loans if it stayed the course on austerity and the new government should not make promises it could not fulfil, he said.

Many Greeks remained unconvinced that Syriza would be able to renege on Greece’s debts or reverse austerity programmes.

“Tsipras promises a lot but I don’t think he will be able to deliver. How can he do all the things he has promised? We don’t have the money,” said Kostas Maganias, 65, the owner of a bar in Athens.
Nikos Chrysoloras and Marcus Bensasson of Bloomberg also report, Tsipras Wins and Sets Greece on Collision Course With Euro Partners:
Greek Prime Minister-elect Alexis Tsipras set up a confrontation with his European peers as he prepared to form a coalition dedicated to ending austerity, saying the era of bowing to international demands for budget cuts is over.

Tsipras issued the challenge to Greece’s euro-area partners after his Syriza party won a historic victory in Sunday’s elections by harnessing a public backlash against years of belt-tightening, job losses and hardship. Tsipras, who is two seats shy of an absolute majority in Greece’s 300-seat chamber according to the latest results from the Interior Ministry, said his priority “will be for Greece and its people to regain their lost dignity.”

Even in a fragile coalition, the result hands Tsipras a mandate to confront Greece’s austerity program, imposed in return for pledges of 240 billion euros ($269 billion) in aid since May 2010. The challenge now for him is to make good on election pledges including a writedown of Greek debt, while persuading creditors in Berlin and Brussels to keep aid flowing.

“There will neither be a catastrophic clash nor will continued kowtowing be accepted,” Tsipras, 40, told crowds of cheering supporters in central Athens late Sunday. “We are fully aware that the Greek people haven’t given us carte blanche but a mandate for national revival.”

The euro rose 0.1% to 1.1214 as of 8:49 a.m. in Athens today after dipping to a fresh 11-year low after Syriza’s win.
Coalition Building

With investors bracing for a drop in Greek government bonds on Monday, Greek voters awakened to find their new government taking shape. Tsipras plans to meet Monday morning with Panos Kammenos, the leader of the Independent Greeks party, to tie up an agreement already sketched out to form an anti-bailout coalition. He’ll also meet with Stavros Theodorakis, the leader of To Potami, a Syriza official said.

“Political stability will be difficult to find,” Vincenzo Scarpetta, a political analyst at the London-based Open Europe research group, said by e-mail. Syriza’s potential coalition partners “only agree in parts” with its platform, he said. “The medium-term outlook is far from clear.”

While Syriza’s victory was more decisive than polls had predicted, the results after 99.8 percent of the vote was counted left the party just short of a majority, with 149 seats in the 300-seat Parliament. Outgoing Prime Minister Antonis Samaras’s New Democracy, which took 27.8 percent to Syriza’s 36.3 percent, won 76 seats. The far-right Golden Dawn placed third with 6.3 percent, followed by To Potami with 6.1 percent.
Samaras Achievements

“I’m handing over a country that’s a part of the EU and the euro,” Samaras said in televised remarks, as he conceded defeat. “For the good of this land, I hope that the next government will respect these achievements.”

Syriza’s victory sends a signal to parties such as Spain’s Podemos that are challenging economic and political conventions across Europe from a country whose output has shrunk by about a quarter and where one in two young people is jobless.

Investors must now wait for Tsipras to spell out how he plans to negotiate Greece’s future financing needs. An extension of the current euro area-backed bailout program expires at the end of February, with Greece projected to run out of money by July at the latest.
Euro-Area Talks

European policy makers including German Finance Minister Wolfgang Schaeuble warned Greece before the vote against diverting from its agreed bailout program. Euro-country finance chiefs are due to discuss Greece when they meet in Brussels on Monday. Germany’s Finance Ministry said in a statement that Schaeuble’s position was unchanged after the election result and “the agreements reached with Greece remain valid.”

Tsipras, while saying that his incoming government is ready to negotiate and cooperate with the EU over debt, declared the era of the troika of the European Commission, the ECB and the International Monetary Fund to be at an end.

“Syriza’s convincing victory in Greece’s election ushers in a new and even more divisive phase in Europe’s fractious politics,” Nicholas Spiro, the managing director of Spiro Sovereign Strategy, said in an e-mailed note. “A dangerous Rubicon has been crossed.”

The election also ends more than four decades of rule by New Democracy and Pasok, the two parties that have alternated in power since the reintroduction of democracy in 1974 following a seven-year period of military dictatorship. Pasok, which won Greece’s 2009 election before requesting an international rescue the following year, took just 4.7 percent.

“The Greek people punished New Democracy for governing in the petty manner of the old regime’s political parties,” Aristides Hatzis, an associate professor of law and economics at the University of Athens, said by phone. “Most Greeks voting Syriza don’t expect a spectacular change but a marginal one. A marginal one would be significant for them.”
Indeed, a marginal change will be significant for Greeks, but I'm highly skeptical of the wild claims Syriza made during the election campaign. Following my trip to the epicenter of the euro crisis back in September, I continue to think Greece is on the wrong course.

Importantly, even if creditors forgave the entire debt of Greece (they've already forgiven a good chunk), the country will never grow and flourish as long as politicians from all parties keep expanding the Greek public sector beast.

Even after years of austerity, there are more direct and indirect jobs related to the Greek public sector than at any time in the past. It's actually a running gag inside of Greece where the private sector has born the major brunt of all these austerity measures. Despite sky high unemployment, hardly any job was cut in the Greek public sector (in fact, New Democracy hired more workers right before the election campaign).

This was Troika's biggest mistake when negotiating with Greece, and now Germany and the IMF are going to deal with growing anti-austerity movements throughout Europe. Greece is nothing, wait till Italy and Spain sock it to the Germans who have myopically focused on austerity and garnered the disproportionate benefits of the euro union.

From that vantage point, Syriza's victory does offer hope against mindless austerity, but the tenor of Syriza’s coalition partner, Independent Greeks led by Panos Kammenos, suggests compromise may be hard to achieve:
Kammenos said as recently as last week that Greek debt should be audited and its “odious” part written down, whether creditors like it or not. Europe, he said, is being governed by “German neo- Nazis.”

“What we will come to Frankfurt and Berlin and Brussels with is a plan to minimise the cost of that Greek debacle to the average German,” Yanis Varoufakis, an economist and Syriza lawmaker who is tipped as a potential Greek finance minister, said in an interview on BBC Radio 4. “We must be very careful not to toy with fast or loose talk of Grexit,” he said, referring to the prospect of Greece’s exit from the euro area. “Grexit is not on the cards.”
Clearly, there will have to be some form of debt restructuring taking place. Distressed debt investor, Wlbur Ross, appeared on CNBC earlier this morning stating he expects interest rate relief is coming, shaving 4 billion euros a year off debt financing costs. He also said they will renegotiate maturities on this debt (see below).

On his blog, Yanis Varoufakis, hailed Syriza victory as a win for democracy, but as I explained in my comment on the myth of Greek democracy, there is no democracy in Greece. "To really understand Greece, you have to understand that Greek politicians are blatant liars and corrupt to the bone. It's not just Tsipras. Successive governments from the Left and Right kept increasing the public sector to cement their political base and now that the country is bankrupt, they still can't cut the public sector beast because they fear political repercussions."

Moreover, Greece is a pathetic oligarchy run by a handful of ultra wealthy families which basically control everything in the country. This is why I laugh when I see Syriza, "a collection of  Maoists, socialists and communists," being funded by ultra capitalists outside of Greece looking to gain more economic control of Greek assets (The only ultra wealthy Greek businessman I truly respect is Vardis Vardinogiannis who lives in Greece, pays all his taxes in Greece, and flies Greek flags on his ships. Of course, he's Cretan so I'm heavily biased).

Now, what does a coalition government led by Syriza mean for global markets? In his Bloomberg comment, Mohamed El-Erian shared these insights:
The Coalition of the Radical Left, known as Syriza, placed first in the Greek elections today, with at least 36 percent of the vote, according to exit polls. The result could even give Syriza an absolute majority and, if it wishes, allow it to govern without a coalition partner. With these outcomes going beyond what markets expected and priced in, here is a Q&A before trading resumes Monday.

QUESTION: What happened and why will it matter for markets?:

ANSWER: The early parliamentary elections have given Syriza a significant and historic victory that surpasses the market consensus.

This is the first time Syriza is in a position to form and lead a government. Its popularity reflects intensifying economic and social frustrations among Greek citizens, including the perception that their long sacrifice hasn't yielded any meaningful gains, let alone any hint of an end to what they see as years of austerity and deprivation.

An alternative economic approach was the core of Syriza's electoral campaign. Its program, which rejects austerity and seeks debt reduction, was pursued with vigor by the party's leader, Alexis Tspiras, who frequently took swipes at Germany, including personal attacks on Chancellor Angela Merkel. He argued that the most influential power in the euro zone was too austerity-obsessed in its approach to Greece.

This has led to concerns that Greece could exit the euro zone. A so-called Grexit would entail the return of a national currency to replace the euro, losing access to European Central Bank financing windows and, most probably, less financial support from the European Union and the International Monetary Fund. It would also raise doubts about some other countries in the region, leading to a repricing of individual and collective risk factors.

An exit from the euro would require the Greek government to counter the immediate threat of significant disruptions, come up with a new medium-term economic vision, strengthen its domestic institutions and pursue a different relationship with European partners that would preserve the country’s access to free trade and certain financing arrangements.

Grexit concerns have been amplified by indications that, particularly compared with 2010-2012, Germany appears less concerned about the negative spillovers for the euro zone -- and for good reason, given the (albeit still incomplete) efforts to strengthen the region’s institutional structures. For example, regional financing mechanisms have been strengthened, banks have been subjected to more rigorous stress testing and a significant portion of national debt has been refinanced with longer maturities and lower interest rates.

Q: How are markets likely to react when trading resumes Monday?

A: If the larger-than-expected Syriza win is confirmed, and especially if it results in an absolute majority, expect a sell-off in European risk assets, including equities. High-quality bonds would be supported by flight-to-quality flows, resulting in lower yields (particularly on German bonds). And look for prices to fall and risk spreads to widen on bonds issued by European peripheral nations such as Italy, Portugal and Spain.

On the currency front, the euro will probably come under pressure, too, exacerbating the recent weakening to levels not seen in 11 years.

Greek markets are likely to be subjected to the greatest pressures, including a notable widening in risk spreads on sovereign and bank bonds. The question is whether this also translates into a significant pick-up in withdrawals by residents of bank deposits as well as capital flight. If it does, Greek politicians would need to quickly take major steps to counter the threat of cascading market dislocations.

Q: Is a Grexit inevitable?

A: No. To reduce the risk, Tsipras would need to embark quickly on a "Lula pivot." That is, he will need to assure markets that the relaxation of austerity would be accompanied by a big push on structural reforms, that the alleviation of the debt burden would be pursued in an orderly and negotiated manner, and that he is willing to engage in constructive discussions with Germany and other European partners.

Q: Are there broader implications?

A: Yes. The outcome of the Greek elections is indicative of a broader political phenomenon in Europe that involves the growth of non-traditional parties. Fueled by concerns about disappointing growth, unemployment and social issues, it is powered by large-scale dissatisfaction with the established political order. And it isn't limited to the peripheral economies.
Let me state once again, I don't think Syriza's victory will bring another euro crisis. There will a lot of huffing and puffing in Athens but when Tsipras and Varoufakis visit Berlin, they'll quickly realize that Greece has very limited options in terms of what it can and can't negotiate. Varoufakis will argue for his Modest Proposal but I doubt it will gain any support.

But Germany will have to negotiate or risk Grexit, which means risking the end of the eurozone and a hit to its banks, something it can ill-afford. Tsipras and Varoufakis know this, which they will use as political leverage to achieve some concessions on debt forgiveness. Either way, there will be very tough negotiations and there will be political repercussions throughout all of  Europe as some will support these negotiations while others will adamantly oppose them.

The bottom line: Alexis Tsipras won, Greeks voted for him because they're tired of austerity but they aren't holding their breath for an economic miracle. Instead, they're hoping the country will reverse course and start growing its way out of this economic morass.

I remain very skeptical. I don't think Greece will ever grow properly until it deals with its public sector beast, which won't happen under a Syriza-led coalition government which will use debt negotiations to further expand the public sector, much to the detriment of the private sector.

Having said this, I don't think economic catastrophe is coming, just more of the same nonsense that Greece has experienced over the last six years. At the end of the day, Tsipras' thirst for power will govern his decisions and he will bow down to creditors and accept some form of structural reform in return for much needed loans. It's pretty much what most cynical Greeks expect.

The bigger fear for me remains the advent of global deflation. That's a huge problem which policymakers keep ignoring or worse still, keep feeding with mindless austerity measures that exacerbate deflation throughout the developed world. When it comes to austerity, implementation has been completely bungled up in Greece and elsewhere.

Below, CNBC's Michelle Caruso-Cabrera reports on Greece's anti-austerity party's general election win and the possible bailout battle ahead.

And Wilbur Ross, WL Ross & Company chairman & CEO, shares his thoughts on the outcome of the Greek elections and the future of Greece and the European Union.

Finally, take the time to listen to a BBC interview with Syriza's Yanis Varoufakis, tipped to be the next finance minister. "We will take to the eurozone a plan for minimising this Greek debacle, we are going to put three or four things on the table: genuine reforms and creating a rational plan for debt restructure.. we want to bind our repayments to our growth," he said. I wish them luck, they'll need it.



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