Greek elections: Grexit overrated?

Syriza expect to win this weekend’s election

Political programme more balanced than feared

Grexit fears overrated

Short term solution with Troika expected to cover funding gap

Long term, more debt relief needed

ECB’s QE-programme outweighs Greek stress on EMU bond markets

Syriza expected to win elections

Greek elections are scheduled for Sunday. Opposition party Syriza still has a significant lead in election polls (see graph). The left party is expected to win the election and grab the 50‐seat bonus in the 300‐seat Greek parliament. However, we think Syriza will fall short of an absolute majority (even taken into account the election bonus). A coalition with centre‐left To Potami (6.5‐7% in polls) is a possibility.

The prospect of a Syriza‐victory clearly frightened (Greek) markets. The Greek yield curve inverted and yields are elevated. The Greek 3‐yr yield trades north of 10%, the 30‐ yr yield trades around 7.74%. On graph 2, we compare the Greek yield curve today and 3 months ago. The sharp deterioration of sentiment in the run‐up to the election is clearly visible.

In the past, the Syriza party advocated reversing Troikainduced austerity policies, huge debt relief and even an exit from the euro zone. We briefly elaborate on whether or not this market fear is justified. Our basis scenario is that a Grexit won’t happen.

Political programme more balanced

The Syriza programme is more balanced than many think, as Alexis Tsipras (party leader) pointed out in a recent opinion piece in the Financial Times. First of all, a Grexit is not in the interest of Syriza, nor in the interest of the large majority of the Greek population.

Second, a Syriza government will respect Greece’s obligation, as a eurozone member, to maintain a balanced budget, and will commit to quantitative targets. However, they differ with the Troika on how to achieve these goals. Negotiations with the Troika will be lengthy and tough on reversing old measures/introducing new ones. Leeway from Europe will be tiny also because Europe has leverage given Greece’s short term liquidity shortage (+‐€10B liquidity gap, see below). The ECB added strength to Europe’s hand with its fresh QE‐programme. The ECB is willing to buy noninvestment grade sovereign debt if the sovereign is under EU/IMF supervision.

Third, Syriza still aims for some sort of debt forgiveness. Public debt has risen to an unsustainable 177% of GDP and Tsipras demands repayment terms that do not cause recession and do not push the people to more despair and poverty. He often refers to the 1953 London Conference which helped Germany achieve its postwar economic miracle by relieving the country of the burden of its own past errors. (Greece was among the international creditors who participated.) In 2012, the Eurogroup promised additional debt relief once Greece reached a primary budget surplus (achieved) and as long Greece “obeyed” to the Troika. If Syriza agrees with the Troika a continuation of the current programme, debt relief in the shape of even longer maturities on existing aid loans & even lower interest rates, is a possibility. Currently, Greek interest costs are already very low at a mere 3% of GDP (eg Portuguese interest cost 5% of GDP). Other haircuts are a no‐go for official creditors, who hold the biggest proportion of Greek debt (€270B out of €330B).

Short term funding gap

In 2014, the final review of the current EU/IMF programme has been tilted over the Greek elections. If the Troika finds an agreement with the new government, the final €7.2B aid tranche will be released. On top, Greece stands a chance of getting a “precautionary lending facility” to smoothen the transition full Troika oversight to complete “independent” control (€11B rumoured coming from unused reserves in a stability fund for the banking sector). Greece needs this money. In March, €4.5B IMF funding is due and in the Summer a combined amount of €6.54B Greek bonds needs to be repaid (ECB holds these bonds). Tsipras says that he will cover this funding gap by increasing bill issuance, but under current regulation Greece can’t increase outstanding bills above the current outstanding €15B. Market funding is excluded as well at current prices and cash reserves are too small (€2.2B).

Long term debt problem

As usual, we expect Europe and Greece to work out a solution to overcome the short term funding gap and remove Grexit/default fears. However, it’s merely kicking the can down the road. Longer term, more debt relief is likely. Redemptions start increasing dramatically from 2022 onwards and Greek growth/inflation is unlikely to be strong/high enough to substantially improve debt dynamics. The IMF currently expects the debt to GDP ratio to be 120% of GDP in 2020.

Market implications

Following a Syriza election victory, uncertainty and Greek event risk remains. This should keep Greek yields elevated. Of late, we’ve seen that contagion effects to other EMU sovereigns are small and certainly don’t weigh against the ECB’s QE bazooka. The latter is the dominant trading factor. We don’t expect a short term default, nor Grexit. In case our basis scenario changes, we’ll certainly update this report.