Is time for the New Democracy leader Mr. Samaras to find enough support and form a coalition government, quite a predictable outcome following the latest comments from PASOK leader Mr. Venizelos, who first opposed unless Syriza also joins in, only to claim he had been misinterpreted later. The joke of politics to its fullest expression indeed.
Let's go into a brief history of what has lead us to this historical moment.
History of Greece in the EU by Ivan Delgado Egea
The country's membership in the European Union dates back to 1981 while the introduction of the Euro became effective in January 1, 2002.
The legal introduction of the Euro in early 2002 left behind 170 years of a monetary system centred around the use of the Greek drachma, first established in 1832 following the Greek war of independence, and which was converted at a rate the rate of 340.750 drachma per euro.
The exuberant and vibrant contemporary economic times from mid 1990 until the financial crisis hit the world, first led Greece, considered the cradle of Western civilization and where democracy was first cultivated, to enjoy an astonishing average growth rate of 4%.
The liberalization of the credit markets in the early 1990s, paired with the introduction of Greece into the EMU in late last century, led to an environment characterized by the stabilization of the domestic economy while an enormous expansion of private credit after 2000 was also noted. The government deficit spending was no longer an issue, as this steady increase in private credit was the engine to boost consumption in Greece.
The climax: tourism and the Olympic Games
Two other contributing factors should be also thrown into the mix that resulted in Greece's investment growth rate to perform so well during 2000s.
Firstly, the shipping and tourism industry produced significant revenue inflows of about 25% of GDP annually, adding to the domestic demand due to deep pockets from credit expansion, which helped to mask huge trade balance deficits.
Secondly, the 2004 Olympic Games was nourished through a campaign of fiscal stimulus through public borrowing, causing the improvement of certain key infrastructure facilities, leading to job creation and even an increase in productivity. Inflow of funds from the European Union, which helped to largely finance new infrastructure investment and improvement in the regulation of certain product markets also helped to Greece’s growth performance during the 2000s.
While substantial improvements were noted in the ‘private standard of living’, the country was still a noticeable laggard in other aspects such as the organization of its society, structural weaknesses, low efficiency and competitiveness, positive differential with the eurozone average inflation and lack of appeal to foreign direct investments, virtually zero.
Looking at the inflationary pressure in Greece, the demand increase driven by the expansion of credit and inflows from the EU-structural were also key drivers to high prices at the time. The tourism and shipping industry and public borrowing, not matched at all by similar increases in the domestic supply of goods and services, also magnified the price dis-adjustments. Foreign inflows such as loans from foreign banks, in both Greek government bonds as well as into the stocks of Greek companies exacerbated inflation.
Despite obvious flaws, Greece ultimately emerged as a country with almost first-class per capita GDP but clearly structural weak institutions, high administrative burden and poor governance, causing extraordinary high levels of corruption.
As years went by, the debt-to-GDP ratio settled steady without any increase due to high GDP growth, although quite shocking was that it did not decline either, thus there was a general perception that the debt was somehow under control. However, as soon as the Euro zone economy began to slow down, Greece's debt-to-GDP deceiving ratio experienced a worrisome increase, as the new government that came to power after the 2004 elections failed to keep up its promise of fiscal responsibility.
As a consequence, Greece's debt-to-GDP rose constantly to the point that by the end of 2009, the projected budget deficit was 12.7% vs. 5.1% of GDP expected by the Annual Budget of 2009. In the budget of 2009 certain expenditures that were until then kept off budget such as procurement of hospitals or the settlement with former Olympic airways employees. These developments were a reality check that led the country to experience a rapid deterioration of the budgetary net position.
As a result of faltering capabilities to generate revenue, unstoppable increase in expenditure and rising interest expenditure, the government was forced to shift many tax returns from the end of 2008 to January 2009 in order to window-dress the 2008 budget, and then in December 2009 the successive government paid out many tax rebates to window-dress the 2010 budget.
The risk premium crisis and the bailouts
The situation was only aggravated on ballooning risk premium between the interest of the German and the Greek 10-year bonds, a simple reflection of the market concerns towards Greek dire finances. The ability of Greece to finance its public debt was put into question as unsustainable borrowing cost kept rising, thus by April 2010, after the Greek government debt was downgraded to junk bond status, they had to be rescued by the EU, the ECB, and the IMF (‘troika’) with a package worth €110 billion before other loans aimed at 'kicking the can down the road' followed.
The government decision to opt for financial assistance abroad, came attach with severe conditionals the Greek government had to implement in order for the 110 billion loan facility agreement to be activated.
Prior to acknowledge openly that a bailout from the 'troika' was needed, and as much as the Greek government attempted to revert the free-fall by tax increases and a decrease in government expenditure through wage and pension bill of the public sector, the measures were perceived by the markets to be “too little and too late”. Reform strategies clearly did not work as they fell way short of the huge government deficit gap.
The brief illusion that unsustainable debt dynamics in the country could be addressed through high interest loans eventually dissipated, clashing with a more logical reality. At the same time, top leaders in the Eurozone were giving up 'playing chicken', moving from defining a Greek exit from the Euro as a ridiculous chatter to publicly discuss the issue as a possible scenario if the country could not fulfill its commitments with the Troika.
In October 2011, Eurozone leaders, with the only goal to prevent 'contagion' effects across Europe by letting Greece default on its debt, continued fighting a 'lost battle' by agreeing to offer a second €130 billion bailout loan for Greece, this time, conditional not only to the implementation of further spending cuts, but also that Greek bondholders should agree to the largest debt restructuring in history. Over 85.8% of private-sector investors committed to swapping their bonds for new ones with less than half of the original value.
Big banks and investors ended losing over $227 billion of expected pay-outs on their holdings. The large debt write-down by March 2012 was attempted to achieve a more 'healthy' debt-to-gdp ratio for Greece, with predictions of a reduction of the debt burden from a forecast 198% of GDP in 2012 to 121% of GDP by 2020.
The massive Greek bond 'haircut' was initially conceived as another stone out of the way for a second bailout to be ratified and provide Greece with financial needs from 2012-2014. The designing of this plan had as chief goal to offer assurances to the world that a Greek chaotic default could be stalled while buying time for the small Mediterranean nations - the real thereat - to fix its economies.
The crisis went from bad to worse after the impossibility for Greece to form a new coalition government following elections held on Sunday 6 May 2012. While it was scheduled to be held in late 2013, an early election had been agreed in order to find nation-wide consensus in the implementation of the latest draconian austerity measures attached to the second bailout agreement a month earlier. The election took place after Greece canceled a referendum late 2011 to decide the acceptance of the austerity pact.
The election resulted in no party with a majority of seats in parliament nor succeeding to form the government in the next week of negotiations. President Karolos Papoulias met with the leaders of New Democracy Antonis Samaras, coalition of the radical left SYRIZA) Alexis Tspiras and PASOK leader Venizelos. As the process failed, another election was called and a caretaker cabinet under Council of State president Panagiotis Pikrammenos was appointed on 16 May, and the election date set for 17 June.
The final act of the Greek tragedy ended well
In the month that followed after the caretaker government was sworn in, speculation Greece would have to leave the Eurozone intensified significantly. The potential exit was coined as "Grexit" and started to affect international market behaviour in the form of a full return of risk aversion. Hysteria to find shelter into safe assets such as the US Dollar and the Yen or buys of bonds like Americans and Germans was the dominant theme day in and day out throughout May.According to the Research Team at Investica UK: "There will be massive international pressure for Greece to form a cohesive government, especially given the destabilizing impact on the rest of the Euro-zone. Whatever the composition of the administration, there is no doubt that it will also be looking to change the bailout terms, but it will have a weak hand to play."
Odds to get the bullet of a weak coalition government unable to govern effectively are very high. However, the German stance over the next few days will be key to find out whether the can can be kicked further down the road or else make them run out of patience.
The German Foreign Minister Guido Westerwelle signaled on Sunday in comments for Reuters that Greece could get more time to cut debt.
"There can't be substantial changes to the agreements but I can imagine that we would talk about the time axes once again, given that in reality there was political standstill in Greece because of the elections, which the normal citizens shouldn't have to suffer from," Westerwelle said on German TV station ARD.
"But there is no way out of the reforms. Greece must stick to what has been agreed. If we said to Greece, no matter what we agreed, it doesn't matter anymore, then we would get a problem with all the other European countries that are diligently and persistently implementing their reforms."
Meanwhile, Fin Min Schaeuble said Greece’s struggles will last but is necessary and will give Greek people prospects for a better future. Separately, the White House said it’s in the interest of all for Greece to remain in the Eurozone and respect its commitments to reform.
Simon Smith, chief economist at FxPro, comments on tonight's result: "The fact that New Democracy came ahead of Syriza, who were looking to drastically re-negotiate the current bailout with the troika, means that markets are likely to breathe a collective sigh of relief, although it could well be brief. Given what is at stake, all parties are likely to negotiate in great detail in order to secure their mandate for a coalition."
We will continue to stand by Greece as a member of the EU family and of the Euro area. We look forward to work with the new government and to support the continued efforts of Greece to put its economy on a sustainable path.
The second economic adjustment programme agreed between Greece and the Eurogroup is the basis upon which to build to foster growth, prosperity and jobs for the Greek people.
We stand ready to continue assisting Greece in achieving these goals.