More Greek elections?

May 8, 2012

Attempts to form a Greek coalition government appear to be running into the sand with no one prepared to dance with the two mainstream parties, New Democracy and PASOK, raising the probability of a fresh round of elections with all the uncertainty that will entail. The far-left Socialist Coalition will have a stab at forming an administration today but doesn’t really have the numbers to do it.

The only plan that looks like it offers a glimmer of hope is that put forward by PASOK leader Evangelos Venizelos. He is after a “pro-European” coalition and has pledged to spread the cuts Greece has been ordered to make under its bailout programme over three years not two. If a burst of realpolitik every takes hold in Athens (and it’s worth noting that nearly all the parties say they want to stay in the euro), that could just be enough to get others on board. BUT, Venizelos would then have to go to Brussels to persuade the EU to go along with this relaxation of its targets and, on and off the record, officials lined up yesterday to say there was no prospect of that happening.
And his PASOK was the party that was most badly humiliated at Sunday’s election so it’s hard to see how it has a mandate to rule the Greeks, a majority of whom voted firmly against austerity, even it is in a broad coalition.

So new elections next month are likely which leaves a very compressed timeframe and who knows what political landscape will result second time around. The EU/IMF/ECB troika is supposed to return in June and can’t negotiate on the next bailout tranche if there is no government. In any case, Athens is supposed to find 11 billion euros of extra cuts as part of the aid programme and none of the parties are in a position to do that as things stand.

One of the burning questions is whether Greece’s euro zone partners are in any mood to cut it some more slack — the atmospherics a few months ago when the second bailout deal dragged on and on suggested they certainly weren’t then. And even if they were, they would have to take into their calculations that any relaxation by Greece would presumably be demanded by Ireland and Portugal too, which could put markets back on alert.

However, the reaction yesterday — with stocks ending well up on the day — suggested that some markets have either bought into the theory that the contagion threat posed by Greece is significantly diminished (see yesterday’s note for reasons) or that they think that the euro zone will somehow muddle through again.
Safe haven Bunds have ticked up at the open and European stocks look set to open flattish so not much to go on there.

Either way, the bigger picture is that Spain remains far more pivotal. The government’s move to clean up troubled Bankia could signal it is finally getting serious about tackling its financial sector, which is it’s main problem. Sources say the state will lend 7-10 billion euros. The less encouraging aspect is that the government appears to be saying that won’t land on its deficit because it will be loaned at commercial rates — the sort of accounting sleight of hand that has got investors’ hackles up in the past.

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