The Greeks will elect a new parliament later this month. The expected winner, the leftist SYRIZA party, seeks to end austerity by negotiating debt relief from its official European creditors - plans that elsewhere in Europe are often cited as synonymous with a euro exit. The coming weeks could thus prove politically tumultuous and volatile in the financial markets. However, the bottom line is that chances for a sensible “European solution” are actually not bad at all.
In late December, Greece’s parliamentary opposition took advantage of a constitutional rule that enables the minority to force early elections - these will now be held on 25 January. The last elections in summer 2012 produced a fragmented parliament and turmoil in global financial markets. Against this background, the new round of voting brings back unpleasant memories - as well as renewed speculation about a Greek exit from the Eurozone, or “Grexit”, and the broader ramifications such an event could have.
Let us first consider the key data. Since May 2010, Greece has received €243 billion in new loans from the Eurozone, the European Central Bank and the International Monetary Fund (IMF). That debt alone is equivalent to 135% of gross domestic product. Furthermore, 69% of these loans has flowed back to the mostly European creditors in some form (mainly for debt repayment, interest, bond repurchases). Another 20% was used to recapitalize Greek banks. Only the remaining 11% was spent to cover the primary budget deficit (which is now in surplus) - i.e. to fund normal public spending needs. Including the debt that resulted from a 2012 restructuring of the country’s old traded bonds, and some other minor items, Greece’s total debt today stands at around €320 billion, or 175% of GDP, of which some €200 billion, or 62%, are now held by Eurozone states. The planned relief talks will most likely focus on this part of the debt, not the traded bonds or IMF loans.
The «Grexit» option, meanwhile, is being brought up in the election campaign as a bargaining chip. Of course, with the cost of all this debt borne by the Greek public, after five years of austerity, and with unemployment at 26%, many Greeks are scoffing at the current arrangement as anything but a bailout. It is easy to see why many voters are turning away from the established political parties - and similar trends can also be observed in Spain and Italy. Economically, the key point is more straight-forward: based on most realistic assumptions for future growth in Europe and Greece, such a debt surge cannot be repaid - especially if the debt’s main purpose is to repay old debts and cover past losses, without contributing anything to future growth.
That said, the Greek bailout programs can be justified as inevitable in the initial stage, when the priority was to put out raging financial fires, prevent contagion, and buy time to build common European rules and mechanisms to deal with the problem. But today, the focus has shifted. Most relevant parties now seem to increasingly agree that, apart from structural reforms, debt sustainability and more immediate action to spur growth are also important - and that is by no means only the case for Greece. Needless to say, the political dynamics that might result within Europe from this anticipated, but unfamiliar, hard left turn in Athens does entail risks that could still frighten financial markets and produce big surprises. Even a “Grexit” is not impossible at this point. However, adjusted for campaign rhetoric, European politics, and various national prejudices and emotions, this prospect remains extremely unlikely - not least because it is neither really necessary, nor truly desired by any relevant party. There certainly remains sufficient scope for meaningful compromises going forward. At the same time, we can also not exclude the possibility that the coming Greek elections could actually mark a new beginning - a phase in which people start shifting their focus away from a legacy blame-game to future growth and investment. Of course, such a development would be a positive for Europe.
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