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#Post#: 256--------------------------------------------------
Will Greek Political Instability Renew Existential Doubts about
EMU?
By: Marc Chandler Date: December 9, 2014, 9:47 pm
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Many global investors limited to investment grade markets or
developed markets, as defined by MSCI have no direct exposure to
Greece. Nevertheless, recent developments in Greece are
worrisome to investors. Many fear that the political challenges
in Greece could lead to its ultimate exit from the monetary
union and default.
This concern has led to dramatic losses in Greek bonds and
stocks. Today's decline in Greek stocks (10.2%) is the largest
since 1987. The 70 bp rise in the benchmark 10-year yield is
among the largest of the year.
There have been a sequence of three issues that have forced the
issue to the fore. First, over the weekend, the Greek
Parliament approved the 2015 budget by 155-134 votes. The
budget was opposed by the official creditors, the Troika (the
IMF, EU, ECB), which had been seeking another 1.7 bln euro in
budget savings. The government's budget went the opposite
direction. It included relief from the tax on heating oil and
the income tax surcharge. It assumed growth would be just shy
of 3.0% next year.
Second, the eurozone finance ministers blocked efforts by Greek
Prime Minister Samaras to exit the assistance program. Samaras
was eager to exit and restore some of its sovereignty ahead of
what will likely be elections in the early part of next year.
Instead, a two month extension of the existing program was
granted, pending final approval. This would be followed by a
precautionary line of credit from the ESM. This may force the
Greek government to amend its budget before the EU grants its
necessary approval.
These two developments set the backdrop for the third. Samaras
has brought forward the selection of next Greek President. This
was expected next February. The issue is that to select the
President, a super-majority in parliament is needed. The
government commands 155 votes of the 300-seat chamber.
The first round will be held December 17. The presidential
candidate needs to secure 200 votes. If that fails, which is
most certainly will, a second round will be held five days later
on December 22. If the candidate fails to secure 200 votes
then, a third round will be held a week later. On the third
try, the candidate needs to secure 180 votes. If this fails,
general elections will be held. The anti-austerity, and at
times, anti-EMU Syriza Party is ahead in the national polls.
Hence the existential concerns.
Samaras has very little room to maneuver. The core opposition
is divided into three parties. Syriza itself has 71 seats. The
neo-fascist Golden Dawn has 16 seats. The Communist Party has
12 seats. These combined 99 seats will likely oppose the
government every step of the way. That leaves 46 seats in
theory from which government needs 25 to secure the 180 votes
needed for the third round.
It is possible but the task is daunting. Moreover, it means
investors should be prepared for brinkmanship tactics. The
value of the 25 needed votes is the greatest in the third and
final round of the parliamentary selection process. Samaras
has nominated former EU Commissioner and Greek foreign minister
Stavros Dimas as the next president. The merits or de-merits of
the candidate are not really being discussed. It is not a
question of principles but of politics.
The fact that Greece is running a primary budget surplus (which
excluded debt servicing costs), it is a better negotiating
position with its creditors. In past, when some debtors began
running a primary budget surplus they were more likely to seek
debt restructuring. Greece's situation is a bit different
because debt held by private investors was already restructured.
The lion's share of Greece debt is now in official hands.
Tspiras, the head of Syriza has indicated he seeks a
restructuring of the debt held by the ECB, EU and IMF. There
are more than one way this can be delivered in a negotiated
settlement. The least likely way is debt forgiveness. However,
there is plenty of precedent for the official sector to lengthen
maturities and reduce debt servicing costs. This seems to be a
more promising path and one that the EU and ECB seemed open too,
provided Greece adheres to its other commitment and delivers a
sustained primary budget surplus. A unilateral default, which
some observers suggest is possible or even likely, does not
appear to be the most probable scenario.
We maintain, as we did consistently during the initial Greek
crisis, that as difficult as it is for Greece inside EMU, it
would be worse to drop out. Dropping out of EMU appears to be a
pre-condition for, and necessitate, default. The new and weaker
currency would make repaying euros, which the external debt
would be denominated in, unbearable. Private sector
(businesses) euro obligations would also likely face default.
It would trigger an new and more severe banking crisis, as there
would not be a backstop for it. This developments would fuel
high inflation and a deep economic downturn.
While peripheral bonds yields are higher today and core bonds
lower, the moves are orderly and rather modest, if one were to
place much credence on the more pessimistic view of Syriza
leading Greece into out of EMU and into default. The euro
itself has moved higher today, which is also not what one would
expect if Greece's departure was so likely.
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