Consequences of Greek turmoil

Greece has been and remains in a self-reinforcing cycle of destructive de-leveraging, with imbalances, capital flight and excessive borrowing made worse by the headlong pursuit of austerity. The drive for austerity, unsustainable sovereign debt levels and politically untenable economic conditions may be extreme in Greece but are similar for much of Europe and it is not clear how European policy makers will deal with both the economic and political tensions. As a result, whilst the Greek economy is small, the way in which Greece is handled is likely to influence how these tensions are managed across all of Euroland.

From first principles, de-leveraging requires a cocktail of debt reduction, austerity, transferring wealth from the haves to the have-nots, and debt monetization.  The balance of these components is key, and after nearly three years of austerity, Greece has not achieved a sustainable way forward with economic conditions even more depressed and debt levels even higher than when austerity began.

In terms of the political dimension, only months ago, the Greek government agreed to another round of austerity as a price for their second bailout package, but the Greek electorate have signaled that they do not consent to these commitments. However they have not voted for a clear way forward and the election has left the Greek parliament fractionalized, potentially requiring another round of elections.

The practical consequence must be reduced probability that Greece delivers on their bailout commitments, and a potential renegotiation of the second Greek bailout will raise other questions.

First, if Greece is unable to meet its obligations to the EU/ECB/IMF, there is the challenge as to how the shift from potential contingent losses to actual realized losses in the EFSF/ESM fund would affect its future use.

Secondly, there is the issue as to whether the political mood evidenced in Greece will affect the electorates and elected leaders in core countries when considering the plight of Spain, Italy and the already bailed out Portugal and Ireland.

Thirdly, there is the question as to whether peripheral countries will consider leaving Euroland and how this may influence their desire to deal with tough austerity and competitiveness measures.

Finally there is no clarity as to what role the IMF may play relative to the EU in dealing with sovereign debt negotiations.

The EU and the Greek government will have to address the near term political realities, and how policy makers deal with Greece reaching the limits of democratically-acceptable austerity will likely affect the decisions of other peripheral countries and how electorates in those countries react to those decisions.

What was noticeable in the Greek elections was the collapse in support for Greece’s two most established mainstream parties (PASOK and New Democracy), and the extent to which the results create a highly fragmented parliament. PASOK and New Democracy, which were forced into a governing coalition last year by the Troika as a condition for Greece’s second bailout, went from commanding 75-80% of parliament (which is roughly what they had held between them for the past few decades) to something less than a third of the seats.  The result of this is that the Greek parliament is more fragmented than it has been in 30 years, reducing its ability to deliver the agreed-upon actions.

This rejection of the current political equilibrium could have material repercussions on Greece’s fulfillment of its obligations under the most recent bailout.  Greece has committed but not yet implemented a host of deliverables including finalizing by June a new package of €11.7bn in fiscal consolidation for 2013 and 2014, some 70 structural reforms (already agreed to but not yet implemented) and laying off 15,000 public sector employees (as an initial step toward a promised reduction of 150,000).

With the Greek parliament fractured and with a reasonably large likelihood of the country having no viable government at all for the next month, there is a real question of Greece’s ability to deliver on those promises.

The politics are messy and whilst polls suggest that over 70% of Greeks want to stay in the euro, about the same number believe that they can find a way to stay in the euro with a much better austerity deal, which leaves considerable focus and onus on politicians across Euroland.  Greece cannot resolve its Euroland issues alone, and the debate on the way forward takes place at a time when the EU is in a broader consideration of the right mix of growth measures and austerity.  Another round of elections in France and the Irish referendum on the Fiscal Pact approach and we can identify a whole series of events in the European political calendar that may affect and be affected by developments in Greece.

Date:                     Event:

May 13                   German State elections: North Rhine-Westfalen
May 14                   Eurogroup (Eurozone) finance ministers meeting
May 15                   Ecofin (EU) finance ministers meeting
May 25                   Bundestag vote on Fiscal Pact (2/3rds majority needed) and ESM
May 31                   Irish Referendum on Ratification of the Fiscal Pact
May 31                   Likely “informal” EU Council meeting  June (early)  Greek govt to pass roughly €12bn
austerity package for 2013-14
June 10 & 17           French National Assembly legislative elections  June 10  Potential date for another
Greek election
June 18-19               G20 Leaders Meeting in Los Cabos, Mexico
June 28-29               EU Council/leaders meeting in Brussels

James Bevan is chief investment officer of CCLA, specialist fund manager for charities and the public sector. CCLA launched The Public Sector Deposit Fund in 2011 to meet the needs of local authorities and other public sector organisations. You can follow James on twitter @jamesbevan_ccla