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Moody’s said that Sunday’s election outcome prolongs financial uncertainty and is credit negative for Greece (Caa1 stable) because it intensifies the country’s refinancing and liquidity risks, undermines depositor confidence and has an adverse effect on economic growth prospects.
“The election outcome throws into question the new government’s ability to agree to a renewal of the financial support programme with the Troika (the European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF)), in a context of delayed disbursements and ambitious spending plans,” said Alpona Banerji, sovereign analyst at Moody’s.
Syriza won 149 seats, narrowly missing the 151 seats to achieve a majority in Parliament. The party has formed a coalition with ANEL (the Independent Greeks), a right-wing Eurosceptic party that gained 13 seats and also campaigned for the reversal of the austerity programme. Both parties are new to governing, and their election platforms focused on appealing to the population’s dissatisfaction with the existing economic conditions.
However, despite the moderating stance of Syriza compared with earlier elections, the challenge for its leader will be to manage the views of the disparate groups that form the party, and also to take into account the views of its ideologically different coalition partner.
“The negotiations with the Troika will take place within this backdrop and will likely be a complicated and lengthy process,” explained analyst Banerji.
Syriza’s position is in direct opposition to the Troika and will make negotiations for renewing the programme very challenging when the current agreement with the European Commission expires on 28 February. The party’s election campaign was based on ending the Troika programme, negotiating a debt write-off and reversing key spending reforms (reinstating the 13th month salary for civil service and increasing minimum wages).
The Troika is expected to return to Greece to conclude the final review of the European Commission portion of the financial support package and the sixth review by the IMF, which has been delayed from last year and resulted in EUR 7 bln in official sector payments to remain undisbursed. Given Syriza’s and its coalition partner’s position, the conclusion of the review will likely be faced with additional delays.
Looking at the upcoming maturities, financing risks are particularly high in the first half of 2015. According to Moody’s estimates, Greece faces large gross financing needs of EUR 20 bln (11% of GDP) in 2015, of which EUR 16 bln are long-term debt repayments, mainly to the IMF, ECB and other official sector creditors.
The rating agency said that the euro area system (including the ECB) holds Greek bonds worth EUR 28 bln, of which EUR 7 bln are due to be repaid this year, mainly in July and August. In addition, more than half of this year’s repayments to the IMF are due in the first half of the year, and three-quarters of the EUR 14 bln stock of T-bills need to be rolled over by the end of March.
Refinancing these T-bills already proved challenging in January at a time of reduced interest from foreign investors and tight liquidity at domestic banks due to recent deposit outflows, which have been evident since early December last year and accelerated in January. According to Moody’s, deposits have declined by EUR 7-8 bln so far, or around 5% since end-November 2014.
Bank deposit outflows are likely to continue, at least until there is more clarity regarding negotiations between the new government and the Troika. Furthermore, the deposit outflows increase banks’ reliance on ECB funding, which in itself is contingent on a Troika support programme.
Official creditor support also remains critical for Greece to meet its medium-term financing needs, given its weak economy and fragile investor confidence. Greek sovereign bond yields have increased to 10% since early parliamentary election first became likely in early December. Consequently, the new government is likely to have discussions on a precautionary credit line from the European Stability Mechanism (ESM, Aa1 stable) in order to maintain access to markets at reasonable rates.
“Given Syriza’s pre-election campaign of rolling back austerity, we expect the negotiation of such a programme to be challenging. We also note that Greece’s participation in the ECB’s recently announced quantitative easing (QE) programme, which would likely support investor demand for Greek government debt, will also be contingent on a positive conclusion of reviews under a potential precautionary credit line,” added analyst Banerji.
All in all, we expect that the policy uncertainty and the reduced liquidity in the economy will weigh on economic growth. Following an expansion of the economy for the first time since 2007 last year (at around 0.6%), real growth is forecast at slightly above 1% this year. However, significant downside risks remain as investment and consumption levels remain low and are further dampened by the political and policy uncertainty associated with this election outcome.
Syriza was elected on an ambitious public spending programme, focused primarily on short-term fiscal measures aimed at rolling back austerity. However, there are doubts about how this can be funded, and as a result there are also questions about how much the new government will be able to deliver.
Additionally, planned structural economic reforms remain unfinished, with important measures such as product market reforms incomplete. Delays or a reversal in the structural reform programme and a return to high-spending government interventionism in the economy would damage medium-term growth and further undermine Greece’s creditworthiness.
At this stage, the economic impact of a Syriza government is therefore unclear, and will ultimately depend on upcoming negotiations with Greece’s European partners.