Greek elections: Big gains for anti-bailout parties

Janet Henry Sunday’s Greek elections delivered a resounding rejection of austerity and a huge dose of political instability — something that is likely to unsettle financial markets. With 98.5 percent of the vote counted, the two major parties, the conservative New Democracy and socialist PASOK with a projected 32.1 percent of the vote, would be unable to form a coalition on their own as they would hold just 149 seats in the 300seat parliament. The

anti-bailout parties, particularly SYRIZA (Radical Left), appear to have won an even larger share (16.8 percent) of the very fragmented vote than suggested by the latest opinion polls.

Attempts will be made in the coming days to form a coalition government, starting with the New Democracy leader's attempt to form a government of national unity with the goal of staying in the euro and realigning the Memorandum of Understanding with the Troika (EU/ECB/IMF). If no government is formed by May 17 then the president will ask parties to agree to a caretaker government ahead of fresh elections, which would be held on June 10 at the earliest. This would inevitably unsettle markets as the new government only has until end-june to update the medium-term fiscal strategy (MTFS) and identify additional measures, amounting to 11 billion euros (5.5 percent of GDP) for the Troika. Markets may also fear an even stronger showing by the antiausterity parties in a second election.

THE RESULTS

The election result is crucial for Greece's future, given that the new government will have the difficult task of imposing the necessary austerity and reforms to meet the terms of the second economic adjustment program. The most market-friendly outcome would have been if the two major parties, the conservative New Democracy and socialist PASOK, which have dominated the political scene in Greece for decades, had been able to form a coalition with a sizeable majority alone, given that they have signed up to the IMF'S Memorandum of Understanding. A high degree of fragmentation in the vote had been widely anticipated but the scale on which recession-weary Greeks shifted their votes to the anti-austerity parties, and the Radical left SYRIZA, in particular, was even greater than expected. With 98.5 percent of the vote counted, SYRZIA won 16.8 percent of the vote (up from a mere 4.6 percent in the 2009 election), beating PASOK (13.2 percent) into third place, while New Democracy won 18.9 percent. So even with the extra 50 seats that the first party gets as a bonus this would leave PASOK/NEW Democracy with just 149 seats in the 300-seat parliament, so two short of what would be necessary to form a government.

The other small parties which made strong gains were also anti-bailout: The extreme right Golden Dawn with 7 percent of the vote, the populist right Independent Greeks (10.6 percent) and the KKE communist party (8.5 percent). Seven parties appear set to enter parliament having each won more than the 3 percent of the vote needed for representation. This does not include the Popular Orthodox (LAOS) Party, which was briefly part of the caretaker government of Lucas Papademos but whose share of the vote fell from 5.6 percent to 2.9 percent.

Nor will it include the Democratic Alliance (2.6 percent) which, apart from New Democracy/pasok, is the only other party which is both pro-bailout and pro-euro.

WHAT HAPPENS NEXT?

Following the election, the leader of the party with the largest share of the vote (Antonis Samaras of New Democracy) will be given the opportunity to form a government. If, after negotiations with the other parties, he fails to form a government within three days, the leader of the second party is given the same opportunity. According to press reports, Samaras has declared that New Democracy will try to form a government of national unity with the major goals of remaining in the euro and realigning (note not "renegotiating") the policies of the memorandum of understanding toward growth. This is likely to be an attempt to woo the pro- European Democratic Left (6.1 percent of the vote) which is anti-bailout but may be willing to compromise in exchange for more emphasis on growth.

With LAOS and the Democratic Alliance having failed to enter parliament, the Democratic Left represent the best chance of Samaras forming a coalition.

After three days, if no coalition has been formed, it would be the turn of the second largest party (the 38-year-old Alexis Tsipras of SYRIZA) to attempt to form a government with the stated aim of overturning the bailout. According to Bloomberg, Tsipras has said he will begin talks with the Greek left parties today but Aleka Papariga, the head of the Communist party, has said she will not form an alliance with him.

Although the anti-bailout parties hold 151 seats, the two anti-euro parties of Golden Dawn and the Communists hold 47 of them.

If there is still no viable government by 17 May, the President himself will attempt to persuade parties to form a coalition or ask parties to agree to a caretaker government ahead of fresh elections (with 10 June being the earliest date this could take place).

THE IMPLICATIONS

The outcome of the Greek election is clearly bad news for the Troika program. The incoming government will need to update the medium-term fiscal strategy (MTFS) and identify additional measures, amounting to 11 billion euros (5.5 percent of GDP), by the end of June, to close the fiscal gap by 2014. It will also need to finalize the details of the bank recapitalization scheme so that banks are given time to reach 9 percent Core Tier 1 target by endSeptember. The targets in the economicadjustment program are ambitious and, in Greece, implementation risks are always high. This will only be exacerbated by ongoing political instability. In the coming days it will become clear whether New Democracy/pasok have succeeded in joining forces with one or more of the smaller parties to form a workable coalition government but even that will have the aim of making some amendments to the current program. If a government cannot be formed then another election will be held some time after June 10.

What happens then would clearly be influenced by the state of financial markets and the way in which the parties present themselves in the intervening period. Given the very strong gains by SYRIZA in these elections, it is reasonable to expect the pro- bailout parties would use the run- up to any second election to pressure SYRIZA to be clear about its position on the euro by drawing voters attention to the fact that if Greece wishes to remain in the euro it has to stick to the spirit of the Troika program.