January 24th, 2015
by Michael Haltman
This Sunday the citizens of Greece will be voting in a national election that will serve as a referendum on the EU-invoked austerity program that the country has been living through!
At stake is the decision that a newly elected government might make to pull Greece out of the Eurozone in what has widely become termed Grexit.
At stake also is the impact that a win by an anti-austerity and anti-EU party might have on the politics of other Eurozone countries that face similar issues and, perhaps, on the viability of the Eurozone itself.
The election became necessary when the Greece Parliament in December failed to elect a new president.
The fear is that a victory by what has been termed 'the far-left wing' political party Syriza, now leading in the polls by anywhere from 3-5%, will result in a default on the debt of Greece and the aforementioned exit from the EU.
Here is a short history:
Back during the depths of the global financial crisis there was a focus by investors and politicians on the financial viability of the EU PIIGS!
The PIIGS are a group of countries around Europe that for better or worse Greece is a prominent member!
The concern at that time was that these countries that also included Portugal, Ireland, Italy and Spain would default on their sovereign debt potentially dragging the rest of the EU down with them.
2-year sovereign bond yields in Greece at one point were quoted in triple digits while the 10-year bond yield, during the height of the crisis, was perilously close to 50%.
This scenario was followed by bailouts and austerity measures that led to investor appetite for these instruments sparked by easy money and a reach for yield.
To illustrate this fact, fast forward to 2014 and the yield on the 10-year Greece sovereign bond traded as low as 5.53% in September.
But, under the heading of what goes up must (may) come down, storm clouds may be back on the Greece horizon! (Source: Greece Sovereign Debt Redux!)
What will happen if and when Syriza wins and why anyone outside of Greece should care!
These are some thoughts from The Economist...
'...There are solid grounds for thinking a deal is possible. Since 2012 Mr Tsipras has become more sensible and his Syriza more professional. He has tightened party discipline. And polls suggest Syriza may have to rely on the support of a more moderate party to govern; that could help Mr Tsipras reach agreement. For their part, troika officials are mulling an extension of the bail-out to provide time for talks. Mr Tsipras has clambered to the top of Greek politics by promising a rupture with the old ways, but in the end may sign up to a classic European fudge.
European officials had hoped to avoid a Syriza-led government. But it should be no surprise if a country that has seen a 25% fall in output, unemployment at 26% and over one-third of the population at risk of poverty rejected those who have overseen such misery. The Germans and others have often displayed a tin ear to the suffering caused by the austerity-first policies they have pushed (Mr Tsipras refers to "fiscal waterboarding"). The surprise is that a radical alternative has not emerged before.
What took you so long?
Still, Europe's establishment is right to worry. The chances of an accident are real. Mr Tsipras must sell a deal to the more militant members of his party, some of whom were never convinced by the euro. Syriza's leaders are inexperienced negotiators, and their pre-election contacts with some creditors have been slim to non-existent. Worse, the latest phase of Greece's euro-zone bail-out expires at the end of February, and various bond repayments are due soon afterwards. That leaves little time for Mr Tsipras and his merry band of neophytes to reach an accommodation.
Explore our interactive guide to Europe's troubled economiesJust as Greece's treatment within the euro zone was never about Greece alone, today its politics resonates well beyond its borders. Podemos, an anti-austerity outfit that has emerged from nowhere to top the polls in Spain, explicitly allies itself with Syriza; its leader, Pablo Iglesias, frames the Greek election as a tussle between Mr Tsipras and Angela Merkel, Germany's chancellor. Podemos's platform is barmy and its leaders, a ragtag of anti-capitalists and Hugo Chávez fans, are not, to put it mildly, ready to govern. But by shaking up a creaky two-party system they may have already performed a valuable service for Spaniards.
One sorry legacy of the euro crisis has been a weakening of the bonds of democratic legitimacy between rulers and ruled. The euro zone has only just begun to grapple with the tensions of a monetary union not backed by a political one. And Mr Tsipras looks more likely to fall back on socialist shibboleths than to tackle Greece's pernicious clientelism and corruption. But if a Syriza victory gives Greeks the sense that they have at least a small influence on their own destiny, that could go some way to repairing the damage of the past few years. For their part, Europeans might consider themselves lucky that their first serious joust with populism has a chance of avoiding disaster.'