Greece: Syriza – z =?

Syria of course…gallows humour or is the situation really so pre-determinedly defined to doom and gloom?

I have focussed in recent  blog entries on the current electoral cycle in Europe that has seen a sea-change in leaders across the Eurozone and the extent to which political leaders have genuinely reflected – or not - electorates’ democratic choices on economic policy and management. Rightly or wrongly the answer thus far has been a series of “niets” for incumbents.

Following France, the Greece is back in the news. And, as I have been commentating, the austerity-only polity has eroded support for the status-quo and the middle ground of political co-habitation. It is no surprise that Syriza has received support for its non-conventionalism for austerity backed thus far by the existing parties in Greece.

What next?

•  Repeating the mantra from the last few blogs, domestic politics will continue to dominate – including in Greece. This means Syriza has more to gain by being the outlier by being seen to stand up to domineering foreigners from the north of Europe. So new elections.
•  I expect Syriza to gain ground but remain short of a majority.

Will Greece leave the Eurozone?

Possibly but it would imply a possible exit out of the EU itself, something that has not really been mentioned.

There is no provision for exit from the Euro – it is “irrevocable”. Then they said the same for the Roman Empire! In the end, like all previous empires and unions, the binding glue is political will. The same applies today – Greek exit will be determined by a confluence of political calculus in Greece, in Brussels, and to a large degree in Germany – both in the capital Berlin and at the ECB HQ in Frankfurt.

In this sense we are not much further from the prevailing situation of pre-elections in Greece. The Euro-zone and the EU economy in general continue to flatline in growth and contagion is no longer a risk but fact.

Despite the ECB’s efforts to turn on liquidity to help the banking sector – and in turn recycle funds into the sovereign debt market – the current travails of the Spanish banking sector shows that the core “stock” problems remain despite “flow” solutions. If anything, the recent attempts to mark-to-value banking assets in Spain will likely highlight need for further capital injections.

And so back to Syriza and the brinkmanship we have seen previously on the debt negotiations. Syriza will not want to see Greek meltdown and assumes – explicitly – that the rest of the Eurozone is bluffing and will not walk-away. The party will aim to maximise the anti-establishment wave of popula

And it is right…

·         The cost to the Euro 16 of a Greek exit would be incalculable and far in excess of any number of guestimates around. If there’s one thing we’ve learnt since 2007 is that estimates tend to  be grossly out of kilt to actual needs.

·         Any student of banking history and bank crises will be quivering at the thought of a Greek exit and the implications not only for Greek banks, but a wave of bank runs that would ensue in the rest of the southern Europe, most likely the rest of the EU, but also EMEA countries in the EU periphery.

·         With credit crunch a reality across the EU – and even worse for EM Europe – we could quickly enter a self-perpetuating cycle of compression of credit, private consumption and growth.

·         Although the vulnerabilities are less than in 2007 the EU economy will still face massive contractionary shocks. The EU firewall is there but a pyrrhic symbol insufficient in scale should a post-Greek exit contagion reign.

·         The cost of ECB financing to Greece is, as I’ve written before, a contingent fiscal liability for the rest of the Eurozoners so there will be a direct hit on EU Public Finances – and which may not yet have been fully factored in by rating agencies.

…and so

1. An explicit forced exit by the rest of the Eurogroup will not happen.
2. Expect status quo, more EU talk of solidarity, a good likelihood of a 3^rd Greek election and some form of fudgy agreement with the eventual Greek coalition that ensures the next tranche payment goes through.
3. Greek opinion does not favour a return to isolation and exit from the Euro. But there is a tail risk that this confused message of a popular backlash against governing elites  (poorly) implementing the EU/IMF blueprint coupled with this continued sense of being part of the EU family may actually lead to a situation where Greece declares an exit from the Euro – but as yet it remains a small risk.

But what of policy? Is Greece solvent – now or even in present value terms projecting ahead? If not, then how will Greece get out of the economic malaise that could otherwise see a decade of misery ahead?