Why Greece Is Still Headed for the Exits

Greek Elections: What they mean for Greece, the euro, the EU—and beyond

By James Pethokoukis

Based on final exit polls, Greece’s New Democracy party will —  narrowly — be the leading vote getter in today’s big elections in Greece, edging out  left-wing coalition Syriza.

Again, this means the Status Quo party (accept the bailout and its condition with some tweaks) has defeated the Stop the Austerity Party (reject the bailout conditions and dare the EU to stop the money) and will have a parliamentary majority. That, of course, if ND successfully enters into a coalition with Pasok, the socialist party.

Here is the breakdown based on those exit poll results:

– New Democracy 127 seats

– Syriza Party 72 seats

– Pasok 32 seats

So a New Democracy-Pasok coalition, which is what’s expected, would get 159 seats in 300-seat parliament.

Financial markets should be mildly reassured by this since a Syriza victory would have accelerated the path to default. (Again, assuming a) exit polls are correct, and b) the conservative ND and Pasok can come to terms.)

But default and a euro departure is likely the final destination, no matter what.

1. The new Greek government may well get some modest concessions from the troika  (the European Commission, the International Monetary Fund, and the European Central Bank). But that will hardly be enough, says Citigroup:

While it may be likely that a modified agreement can be found, in our view, any new Greek government, regardless of its composition, will struggle with implementation challenges related to the imposition of further austerity measures demanded by the Troika in exchange for further assistance, and is unlikely to have the political will or capacity to implement unpopular structural reforms, especially of Greece’s public sector, and carry out privatisations that are planned to yield up to €50bn by 2017. We therefore consider it likely that a new troika deal would ultimately fall apart and lead to Grexit.

2. And this is why minor adjustments just won’t matter. During the past three years, Greece’s GDP has contracted by 16%. Unemployment has risen to 22%. The economy is on track to shrink another 7% this year. As AEI’s Desmond Lachman describes things, “Greece’s economy is in a state of true collapse.”

And here is what the new Greek prime minister faces:

The new Greek prime minister will find that, as a result of a collapsing economy, Greece’s public finances are in much worse shape than the IMF had foreseen earlier this year. This is reflected in declining tax receipts and in mushrooming government payment arrears that are now in excess of 90 days.

He will also soon find that, as a condition for its next loan disbursement, the IMF will be asking Greece to identify and obtain parliamentary approval for 5.5 percentage points of GDP in public spending cuts for 2013 and 2014.

And he will know full well that, with more than 60 percent of the Greek electorate vehemently opposed to further fiscal austerity, he will risk social anarchy if he persists in getting parliament to approve further IMF-mandated hair shirt fiscal austerity.

3. Greece will probably have to leave the euro in September or December. Again, Citi:

We doubt whether Greece will be able to deliver on the austerity-lite revision of the MoU that is likely following a favourable outcome of the elections. We also don’t think it likely that Greece will be able to deliver on the targeted privatisations and structural reforms. With conditionality violated in all three key dimensions, we believe it is therefore likely that the plug will be pulled by the troika on further funding of the Greek sovereign, either following the September assessment or, more likely, following the December assessment.

A possible trigger would be the determination by the IMF following the first or second assessment, that it cannot disburse its next installment due under the current programme because the Greek programme is not fully funded for 12 months after the assessment. In that case some of the smaller core euro area member states that have made their contributions to the Greek EFSF programme conditional on the IMF disbursing would probably drop out too. The Greek sovereign would then be forced to default. Then the ECB would stop funding the Greek banks through the Eurosystem and through the Greek ELA.

With neither the Greek sovereign nor the Greek banks having access to the lender of last resort, we believe Greece would probably leave the eurozone, as some liquidity through the issuance of New Drachma is better than no liquidity.

Bottom line:  Greece is still likely headed for the exits this year. The economy is just too sickly to meet the bailout requirements, and Germany is highly unlikely to ease them enough to make a difference.

Although a ND-Pasok coalition should give financial markets a brief breather, it might be as brief as it was after the $100 billion bailout of Spain. Uncertainty will drive the EU into a deeper recession, and will keep U.S. markets and companies on edge. And if ND and Pasok cannot come to terms, the Grexit could some (even) sooner rather than later.