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Financial Mirror (Cyprus) - - FRONT PAGE -

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.

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