Greek Elections Raise Euro Risk

Results also prompt calls for policies to boost European growth.

Greece’s election, in which the two main parties failed to win a combined majority, raised the risk that the nation will exit the euro and prompted calls for policies to boost European economic growth.

Greece now faces a 50 percent to 75 percent likelihood of leaving the euro in the next year to 18 months, Citigroup Inc. economists Guillaume Menuet and Juergen Michels wrote in a report today. They’d previously estimated the risk of a euro exit at 50 percent.

“Every country can decide to leave the common euro area, of course Greece can as well,” Austrian Chancellor Werner Faymann told state radio ORF today. “You just have to know what it means -- and the Greeks will have to consider that.”

Greek stocks fell the most in 3 1/2 years after voters flocked to anti-austerity parties in yesterday’s polls. Along with Socialist Francois Hollande’s win in France’s presidential vote, the Greek outcome compels Europe’s leaders “to reflect” and “urgently adopt concrete policies for economic growth,” Italian Prime Minister Mario Monti said in a statement.

Greece’s political leaders struggled today to find the support needed to form a coalition government, calling into question the country’s ability to impose the measures needed to guarantee its future in the euro. The country is due to present details to creditors in June a plan to save 11.6 billion euros in 2013 and 2014 as part of the second bailout deal.

New Democracy, which partnered with the socialist Pasok party to secure a second rescue package for Greece, won 19 percent of the vote and 108 seats. Pasok trailed in third place with 13 percent and 41 seats. Combined, the two parties are two seats shy of 151 seats needed for a majority.

Syriza, a coalition of leftist parties that has vowed to cancel the bailout terms, got 16.8 percent of votes and 52 seats as the second-biggest party.

“The Greek elections resulted in one of the worst possible outcomes” that “will add to the uncertainty,” Credit Suisse economists including London-based Yiagos Alexopoulos, said in an e-mailed note. “The most likely alternative, at this stage, would be new elections next month.”

The election was the first since Greece helped trigger the European debt crisis and comes as voters across the region turn their backs on austerity measures backed by German Chancellor Angela Merkel. In France, Hollande defeated President Nicolas Sarkozy yesterday and in Germany Merkel’s party suffered its worst result in more than a half a century in the northern state of Schleswig-Holstein.

 

German Reaction

“The result is not uncomplicated, but I think the most important thing is that we give Greece the possibility to evaluate the results on its own,” Merkel told reporters in Berlin today.

“It is of utmost importance that the programs that we agreed on with Greece continue to be implemented,” she said. “The process is a difficult one, but despite that it should go on.”

The European Commission said the next Greek government needs to abide by bailout terms agreed to by its predecessors, and voiced confidence Greece will stay in the euro, spokeswoman Pia Ahrenkilde Hansen told reporters in Brussels today. She called on Greece to form a “stable” government.

Bowing to German calls for austerity, Greece agreed to impose pension and wage cuts in return for two international rescues worth 240 billion euros ($312 billion). Greece must continue spending cuts to keep disbursements flowing. Failure to do that may determine whether Greece remains in the euro.

The cuts have come even as Greece’s economy is mired in its fifth straight year of contraction. Gross domestic product shrank an annual 7.5 percent in the fourth quarter, and the Bank of Greece says GDP will fall about 5 percent this year. The jobless rate has reached almost 22 percent.

Should Greece leave the euro, it could be faced with capital flight as well as euro-denominated legacy debt with a new currency that would be worth less than the euro, Austria’s Faymann said. National Bank of Greece SA, the country’s largest lender, plunged 15 percent today.

“Those scenarios, the pros and cons will certainly be discussed in Greece in the coming weeks and you have to talk about this very clearly,” Faymann told ORF. “You will have to tell the people what happens when a country leaves the euro.”

 

Greek Debt

European taxpayers are on the hook for a majority of Greek debt. After two bailouts since 2010, 73 percent of Greece’s 266 billion euros in debt is held by the European Central Bank, euro-area states and the International Monetary Fund, according to Greece’s debt office. In 2010, before the first rescue, Greece owed about 310 billion euros, all to the private sector.

Monti said the Greek and French election results will give Italy more room to continue to push for economic-growth policies at the European level. “Responsible public finances are a necessary condition, but certainly not sufficient to meet to the key goal: sustainable growth that creates jobs while ensuring social fairness,” he said in the statement late yesterday.

Monti was echoed by Hungarian Prime Minister Viktor Orban, who told reporters in Budapest today that the two elections showed Europe must focus on economic growth and jobs.

Pasok leader Evangelos Venizelos, the former finance minister who negotiated the second rescue packages, said voters had provided no clear mandate. Former Prime Minister George Papandreou told Italy’s La Stampa newspaper that Greeks had voted against austerity, not against the European Union.

New Democracy leader Antonis Samaras said he’d try to put together a “national salvation” government that will keep the country in the euro. As leader of the biggest party, Samaras is due to receive a three-day mandate today to try to form a government. He meets with the president at 3 p.m. Athens time.

“A ND-Pasok coalition with a very narrow majority would probably not last long, perhaps not even through the vote on 11.3 billion euros in new austerity measures for 2013-2014 that is due in January, according to the terms of the second Greek support program,” Holger Schmieding, London-based chief economist of Berenberg Bank, said in an e-mailed note.


 

Bloomberg News

 

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