Survivor: the Greek Islands edition

By J Brooks Spector 18 June 2012

Depending on one’s faith in – or fear of – the wrath of the Greek electorate, looking ahead to the results from Sunday’s parliamentary election and their roll-on effects on the future of the euro, either the emergency surgeon or the pathologist may need to be on stand-by duty. J BROOKS SPECTOR examines the leaders of the New Democracy and Syriza Parties as they challenge for the right to lead Greece, as well as the worst-case scenario if Greece ends up staging a disorderly departure from the euro zone. Hold onto your hats, there is lots of horse-trading yet to come.

Throughout the day, the election seemed a battle between the centre-right party, New Democracy, led by Antonis Samaras, and the “new left” coalition, Syriza, led by Alexis Tsipras. Exit polls and partial voting data now indicate that New Democracy has edged past Syriza in the voting, leaving them at around 30.5% to 26% respectively. It is therefore increasingly likely that New Democracy will be the party that tries to establish a governing coalition which might include the left-centre but euro-supporting PASOK. 

However, even as this story was being published, there were rumours that PASOK leaders would not join such a coalition unless Syriza, too, joined a broad “grand coalition” to share the pain across the political spectrum – even if this made less-than-compelling ideological sense. If the New Democracy does succeed in building a coalition, because of the special features of the Greek system, it – and therefore the coalition – will get a bonus of fifty extra seats in the 300-seat parliament to ensure an actual governing majority in parliament, albeit one with a very narrow popular base of support.

Syriza earlier emerged in the most recent (but inconclusive) election in May as the country’s rising political power centre, thoroughly eclipsing the old centre-left party, PASOK. (Amateur Cassandras can also keep a bit of space and energy available to worry about the outcomes of the French parliamentary and Egyptian presidential elections. Oh, and there is still that ongoing Syrian disaster to keep watch over as well.) 

Writing in the New York Times on the eve of the election, a leading Greek journalist, Nikos Kostandaras, contemplating the results of the upcoming election in his nation, wrote, “My country is hurtling toward an election that will decide its fate — whether Greeks will fight on to remain part of Europe’s core or succumb to their own weaknesses and turn inward, choosing isolation, anger and uncertainty greater than that from which they wish to flee.” 

Meanwhile, Jacob Funk Kirkegaard, Peterson Institute for International Economics research fellow, had worried publicly, “A Syriza victory (e.g., status as the largest party with the extra 50 parliamentary mandates that entails) on June 17th would… not result in a Greek exit from the euro area. Nonetheless, this would be a far worse short-term outcome for Greece. First of all, it is unlikely that Syriza would win so big that it would have a majority of its own, meaning it would be required to form a coalition government with other parties.” That, Kirkegaard argued, would be difficult, given Syriza’s espoused positions. Therefore “the specter of another hung Greek parliament and a possible required third election would thus loom if Syriza became the largest party on June 17th.” 

Kirkegaard went on to add, “It would, however, seem probable that the Greek government will run out of cash before a third election could be held, making the formation of a ‘national salvation/unity/technocratic’ government the likely outcome, although it is unclear what such a government could achieve with respect to securing urgently needed funding from the IMF/euro area.” That’s clearly not optimism from a practitioner of the dismal science. Although Kirkegaard’s worst fears seem not to have been realised, the shape of the final government remains up in the air. 

So who are these two men who would lead Greece in trying to rearrange its relationship with the EU, the euro zone and the austerity regimen imposed upon it by its creditors? 

Antonis Samaras is a US-educated economist who graduated from Amherst College in 1974 with a degree in economics, and then earned an MBA from Harvard University in 1976. His centre-right party earlier had earlier won an inconclusive victory in the 6 May election. His party’s insistence on staying in the euro zone had created a stark choice for the Greek electorate – in contrast to Syriza. Samaras insists that if Syriza came to power, it would move to leave the euro zone and revert to a new drachma – with all the chaos that would entail. In the recent 6 May election, New Democracy won just under 19% of the vote, but that left it with so few parliamentary seats it could neither govern alone nor create a coalition government. 

The 61 year-old Samaras generally upholds all those elements of the hard bargain that had Greece giving its various international creditors some tough austerity commitments, in exchange for the emergency loans to keep the government afloat. However, Samaras has also argued he wants to see these dolorous commitments diluted through a two-year extension, until 2016, to lessen the current pain. 

In addition, Samaras has also pledged to cut tax rates and boost the income of low-earning pensioners, large families, farmers, police and fighter pilots, and he wants to “retake” Greek cities from illegal migrants and scrap laws that have granted citizenship to second-generation immigrants. He was a rapidly-rising conservative star in the late 1980s and briefly served as finance minister and foreign minister when Greece’s name dispute with Macedonia broke out in 1991. (The Greeks have wanted the new state to call itself The Former Yugoslav Republic of Macedonia to differentiate it from Greece’s own Macedonia province, and thus to preclude any claims on Greek territory by a putatively irredentist Macedonia.) Samaras then spent a decade in the political wilderness, owing to his advocacy of a hard line on Macedonia, but he was eventually allowed back into the New Democracy political fold. He became its leader after a dismal showing in the 2009 election. 

And Syriza’s Alexis Tsipras? He is a 37-year-old former communist student rebel who has now repositioned himself and his party as Greece’s salvation from the twinned disasters of either a precipitate exit from the euro zone or a thoroughgoing national economic meltdown. To some, Tsipras may seem more like an aging student politician than the answer to Greece’s national agonies, but the Financial Times warns “it is short-sighted to underestimate his ambition and willpower.” 

Greek historian Thanos Veremis, a man who knew Tsipras before the debt crisis really began three years ago, says of Tsipras, “He was a likeable young man. He looked streetwise. He’s no thug. He’s very composed. He never loses his cool. This is a good sign. It shows he’s intelligent. [However], student politicos like him were out to do well out of politics. Politics was a business for them. Tsipras has made it big time. He’s now the aspiring prime minister of Greece.” 

Even if New Democracy ultimately achieves a governing coalition – with or without Syriza – unnerving prospects may remain for many, in addition to the diminishing number of Greeks who have left their euros in the banks. (If the country left the euro zone, presumably those bank deposits would convert somehow into a new national currency and promptly be devalued against the euro by as much as 50%, some say.) 

Besides those nervous Greek citizens, Greece’s EU – and especially its euro zone – partners and the world’s financial markets are tensed against sound of the dropping of that second financial shoe from the upstairs room. A coalition that includes New Democracy and Syriza would drive some serious horse-trading over which demands to make of the EU partners or which austerity measures to delay implementing – and that would still leave things pretty murky. 

In previous statements, Syriza explicitly stated its hostility towards the terms on which Greece received two multi-billion euro injections from the EU and the IMF. Given that strong disagreement with those terms, a Syriza partner in government would still find it hard to walk back from its announced policies, find space for compromises with its many creditors and simultaneously keep Greece within the euro zone. 

Of course Tsipras and Syriza are in the business of politics – not construction engineering – and they have already engaged in a bit of dialling back from the most severe anti-creditor rhetoric of a month ago. This follows the May election, when Syriza raced to second place in the polling, displacing PASOK on the left. Syriza’s strategists insist their party is not going to suspend Greek debt repayments unilaterally and that they will, in their own way, honour the country’s agreements to implant some fiscal discipline to its accounts. Regardless of the precise shape of any coalition, the negotiating stance of Greece’s leadership will need to become clearer within just ten days’ time – for the EU summit on 28-29 June. 

Some observers of Greek politics predict Tsipras’ interlocutors, in or out of government, will encounter a wily determination lying beyond his charm. As one long-time school friend told the media, “Tsipras has always been charismatic, but he’s a bully, too. He always wanted to get his own way.” To many, his rhetoric and behaviour recall those of Hugo Chávez or the late Andreas Papandreou, the Greek socialist prime minister whose particular devil was always American imperialism. 

By contrast, Tsipras came of political age in a universe that already included Greek membership in the EU and euro zone. As a result, his particular fire is aimed more at European policy makers who, by his lights, genuflect too readily before the altar of implacable global finance. 

Further, Tsipras has no record of calling for, or already being a generator of, a vote-winning patronage machine in the manner of Andreas Papandreou – in part because Tsipras has eschewed the machine politics style that helped bring Greece to its current uncomfortable spot. And he has so far been unable to demonstrate convincingly that he can rein in his wild and woolly group of political groups that range from enviro-radicals to Trotskyites, Maoists and Castroites. Veremis has labelled this mélange dismissively as “a cemetery of dead ideas”. 

On a personal basis, Tsipras was educated entirely within Greece and, in contrast to most other Greek politicians, has travelled abroad less often as well. From his comfortable cocoon of a middle-class upbringing, he became a Communist Youth member in 1990, ironically just as fraternal parties were collapsing in the old Soviet Union and Eastern Europe. Eventually the formal communist party became rather too dogmatic for a more pragmatic and career-conscious Tsipras. Leaving the communists, he moved to Synaspismos, another left-wing party at the core of Syriza. In 2006 he came in third in the race for mayor of Athens. Then, two years afterwards, he became the new leader of Syriza, displacing Alekos Alavanos, his political mentor. 

So what’s the worst-case scenario of an unwieldy coalition: a stalemate over re-renegotiation of arrangements between Greece and the euro zone/EU/IMF; a default by Greece on its debts; and a defection or ejection from the euro? Not surprisingly, commercial and central bankers, governments and investors are all trying to get ready for this eventuality. For some analysts, this worst-case scenario has numerous governments defaulting on sovereign debts, a panicked run on European banks and a worldwide credit crunch reminiscent of the financial crisis in the fall of 2008, in the wake of the Lehman collapse.

The scenario planners say that once the crisis begins in Greece, it would move swiftly to the rest of Europe, and then wash up against the US economy as well. Stocks and oil prices would fall precipitously, the euro (and a host of other currencies) would sink against the US dollar, and many banks would start to discover losses they would suffer as a range of complex trades they had participated in previously.

Worst case, events start out as messy and just keep on getting more unpleasant. Following a failure to renegotiate and an ejection or rejection of the euro, the Greek government would reestablish the old drachma as the country’s currency – announcing that one drachma was worth one euro. That would probably last about a nano-second. Experts say the drachma would drop by about half soon after it was released. For the Greeks, of course, that would equal some really heavy inflation – perhaps as much as 35% within a year. 

Because the country is a net importer, it would end up paying a heavy premium to bring in oil, medical supplies, food – and anything else made somewhere else. Given the ensuing chaos, the Greek central bank would have to issue lots and lots of these new drachmas, since it would be frozen out of international lending markets, according to Athanasios Vamvakidis, foreign exchange strategist at Bank of America-Merrill Lynch in London. Greece’s government and banks are now living on international aid and “without access to markets, they have to print money.” 

That, in turn, would lead to a Greek default on its sovereign debt and that – in turn – could trigger losses for the European Central Bank and numerous other international lenders. But wait, there’s more! Foreign banks would end up writing off loans to Greek businesses as well, as Greeks declined to pay their various international debts that would have gone up twofold in their effective cost to the debtors. 

That, then, becomes a body blow to many European banks. In recent months these banks have already managed to get rid of much of their Greek debt, but they still hold about $65 billion’s worth – mostly that of corporations. Analysts say French banks are the ones with the most to lose. 

Okay, now things really get rough as contagion spreads. The European Central Bank and European Union would be in the position of needing to convince bond investors that they would prevent Portugal, Spain and Italy from leaving the euro, right behind Greece. Failure to do that would cause their respective borrowing costs to shoot up, even as financial experts now argue that a firewall established earlier to stop such a contagion crisis is already insufficient. For example, there is about $310 billion still left in the European Financial Stability Facility, but that money was actually pledged by the very countries that may wind up needing it for themselves, says Vamvakidis. 

There is also that European Stability Mechanism, but it hasn’t actually been brought into existence yet as a function of German foot-dragging. The problem, of course, is that a contagion crisis operates like the spread of a disease that disperses widely by various vectors. In this case, however, rather than the air, handkerchiefs, fleas, mozzies, or a waterborne source, it is the bond market that drives the epidemic, as banks, currency traders and governments all come together. For example, if Greece drops the euro, traders inevitably get more suspicious of Spain, Portugal and Italy and sell those countries’ government bonds, pushing their prices down and driving their interest rates up as a measure of increasing risk from the perspective of potential purchasers. 

This growing lending cost, in turn, starts to squeeze those countries’ budgets – pushing them further into recession. That collapse of bond prices then becomes a problem for already troubled banks on the continent – those that had purchased government bonds when they were considered to be safe, reliable investments. 

Now the risk builds for a run on banks around Europe, producing those inevitable scenes – on satellite TV news channels, of course – of people besieging their banks to withdraw whatever they can before the banks collapse or the governments turn their euro-denominated accounts into increasingly fragile individual currencies. At worst, every one of those would-be withdrawal candidates would have seen what had already happened in Athens and none of them would want to be the last man in line clutching a bank card. 

Of course, in less perilous times, governments can come to the rescue to lend cash to banks or even take them over as a temporary measure. European countries have already committed themselves to lend up to $125 billion to Spain’s banks to help save them. But if this happens in the midst of a government debt crisis, the Spanish, Portuguese or Italian governments probably couldn’t borrow enough cash from investors to rescue things before the spiral accelerates. 

But, of course, all this would unfold in the middle of a government debt crisis. If the crisis gets worse, the Spanish or Italian governments couldn’t borrow enough cash from investors to save the day. Robert Shapiro, a former US undersecretary of commerce in the Clinton administration, says, “They can’t afford to guarantee deposits or money market balances. They don’t have the ability to borrow internationally from bond markets. Where are they going to get the funds?” 

Then this just keeps on giving. Banks could fail, the remaining banks cease lending to one another, and that would generate a credit freeze that shuts down Europe financially just as much as last winter’s blizzard did so physically. 

Of course, one way to put the cork back in the bottle would be the creation of euro bonds backed by all euro member countries. Such bonds could be sold to raise money for the troubled European governments under assault. While Germany, the strongest economy on the continent, is warming to the idea, the Germans want to see the weak sister governments fix their finances before anything else is done. Or, as German chancellor Angela Merkel said last week, “Germany’s strength is not infinite.” 

And yes, the IMF might help out, as the $28 billion or so it has already lent to Greece might be at risk as well if it doesn’t get behind a solution. European governments under threat theoretically should be able to go to the IMF for help, but remember, the IMF’s money comes from its member nations, and the US and several other nations may resist such additional loans if they think the sums don’t work or these funds would similarly be at increasing risk. 

Now things get really serious. The contagion spreads across the Atlantic (and perhaps the Pacific) through a dense web of contracts, loans and other financial transactions that tie banks together. Keep in mind those credit default swaps that helped make such a mess of things back in 2008. They are a kind of loan insurance a creditor takes out after lending money to a business or government. Then, if the borrower runs into trouble and can’t pay – for example, if the government of Spain defaults on part of its debt – the banks that sold the insurance cover the loss. 

But what if a large number of these come due all at the same time because of losses? When the markets treat a nation like a bad credit risk, those who took out insurance on such debt to protect against defaults can insist that the banks that sold the insurance prove they can make good on the claim. That makes the insuring bank sell off something else to get its hands on more negotiable cash to prove their solvency. In a crisis, that generates a cascade of urgent selling, spreading trouble from one market to the next. Another problem, of course, is that no one actually knows how much risk US banks have vis-à-vis Europe with those credit default swaps and current regulations allow banks to keep such information secret. Here’s something for Congress to do right now, isn’t it? 

For a dyed-in-the-wool pessimist – or realist – there are still other ways the mounting turmoil could infest US financial markets. Money market mutual funds – and they have more than $2.5 trillion under their control – have an estimated 15% of their investments in Europe. On the other hand, European banks continue to be large buyers of US mortgage bonds and if they have to sell those to raise cash, US mortgage rates could jump upward, and that is a threat to a still-weak US housing market. Frightened banks might even pull credit lines they issued to companies in support of global trade operations.  

Is there any good news in all this? Well, most experts don’t believe such a crisis will get that far. Bankers who have to factor in a Greek exit from the euro will be pushed into action ahead of disaster, and the US Federal Reserve Bank and other central banks must have learned a thing or two since 2008. They will be prodded into action as well – before the actual script for the disaster movie is more than just exciting scenario treatment. 

Just for entertainment’s sake, Barclay’s experts have calculated that, should the bad stuff all come out from under the bed, world oil prices would fall to $50 per barrel, stock markets beyond Europe would drop around 30% in value and the dollar would rise in value to about that of the euro. 

One year ago, the Economist helpfully observed about potential future events now coming true, “ ‘What we must avoid,’ confided a government minister in the spring of 2011, ‘is the perception among our European partners that ‘here come the f–king Greeks again’.  Job not done.” 

A key part of the problem, of course, is that the euro was designed for the good times and in an imagined era of boundless optimism. Now that the times are not so good anymore, the euro’s caretakers are struggling to sort out how to manage things. Brown University political economist Mark Blyth explains that, unfortunately, every solution that’s supposed to fix a problem just creates another problem. A $125 billion loan to save Spanish banks, for example, just adds to that country’s debt burden as well as on other troubled European countries. That sends borrowing costs higher and puts a tighter squeeze on budgets. Cheerfully, Blyth adds, “The euro itself is a bloody doomsday machine.” 

At this point, however, it appears that Greece – and the euro zone – has just managed to dodge a bullet with the growing likelihood that New Democracy’s Antonis Samaras will lead Greece’s next government. Assuming this happens, this government will be supportive of a continued status inside the euro zone, albeit with adjustments to previously negotiated austerity conditions. Regardless – at least in the short run, however – the one thing that is almost certain is this: vacations in the Greek isles will soon be available at really significant discounts, as long as you hold dollars, pounds, euros, Swiss francs or Saudi riyals. Or maybe not even the latter one if the oil price drops from all the chaos. Book early to get the best deals. DM

Read more: 

  • Greece pro-bailout parties could form govt at the AP
  • Greek conservatives New Democracy ‘in narrow poll lead’ at the BBC
  • Greek elections: Greece returns to the polls – live coverage at The Guardian
  • Wait and flee – Electoral uncertainty sends the economy into suspended animation in the Economist
  • A Critical Vote in Greece on Its Standing in the Euro Zone in the New York Times
  • No Delphic clarity as Greek vote looms in the Washington Post
  • The loud-mouthed radical awaits his fate in the Financial Times
  • As Greeks Head to Polls Again, a Fear That No One Will Win in the New York Times
  • Troubled Greek Economy Is Being Left to Fend for Itself in the New York Times
  • Greek election: Candidate Alexis Tsipris hopes an earthquake will shake the euro zone Sunday in the Washington Post
  • How Greece Squandered Its Freedom, a column in the New York Times by Nikos Kostandaras (managing editor and a columnist at the Greek daily newspaper Kathimerini)
  • Greek elections – Euro or drachma? In the Economist
  • Between two nightmares – Angela Merkel is drawing the wrong lessons from the chaos of German history in the Economist
  • This Week in the Euro Area and What to Expect from Greece on June 17th
  • by Jacob Funk Kirkegaard at the Peterson Institute for International Economics website
  • Eurozone crisis explained at the BBC website 
  • Greeks weigh consequences of pivotal vote at Reuters 
  • Battening down the hatches at Reuters 
  • The Greek Election and the Future of the Euro, video of a colloquy at the Brookings Institution 
  • World awaits Greek election fallout at the Financial Times

Photo: Conservative New Democracy leader Antonis Samaras addresses supporters in the party’s main election kiosk in Athens’ Syntagma square June 17, 2012. Parties committed to Greece’s bailout were on course to secure a parliamentary majority on Sunday and the radical leftists who had vied for first place conceded defeat in an election that could keep the debt-laden country in the euro zone. (REUTERS/Yannis Behrakis)


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