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The first victims of the elections

 Results are increasing political uncertainty and putting at risk Greece’s position in the euro

By Dimitris Kontogiannis

The outcome of the Greek general elections based on exit polls and early voting returns showed on Sunday night that the country was entering a period of political uncertainty amid the worst economic crisis in the last several decades.

The heightened political risk will most likely compound the country risk and have detrimental effects on economic prospects unless a stable government is formed, but this does not look likely to be the baseline scenario.

Early projections showed the two main pillars of the Greek political system, namely conservative New Democracy and socialist PASOK, which approved the second European Union-International Monetary Fund bailout package, were falling short of the minimum 151 seats needed to govern in the 300-seat Parliament.

Both parties -- and especially PASOK -- paid a big price for approving economic austerity policies in return for EU-IMF loans to keep the country in the eurozone, but this should come as no surprise. This is largely so because they both failed to communicate to the masses that Greece’s position in the euro area was at stake by not sticking to the terms of the bailout.

We would not be surprised if New Democracy leader Antonis Samaras tried to form either a minority government or propose a government be formed by respectable personalities from various parts of the political spectrum with the backing of other political parties. This way, he will not be joining forces with PASOK, which he and other conservative strategists consider a political liability, and will not be blamed for snap elections if it comes down to that.

Whatever the case, the country will most likely not gain a stable government in the weeks ahead and has to face a grim economic reality, starting today. First of all, one would expect the Athens stock exchange to sink on Monday, with bank shares leading the way. Given the fact that the Athens bourse’s general index has been falling steadily for a long time, the drop may not be as severe as one might expect.

Spreads on the new Greek government bonds are bound to widen sharply following the election result, but this will not have a direct effect on the country since it does not borrow from the markets except for short-term debt paper, that is, treasury bills.

However, the wider spreads should have an adverse impact on the value of the collateral local banks have placed with the European Central Bank to obtain liquidity. In other words, one would expect the ECB to lend Greek banks less for the same nominal value of government bonds and other Greek securities used for collateral.

Moreover, it is reasonable to assume it will be even more difficult for Greek banks to convince private investors to participate in the future share capital increases to avoid nationalization. A tough task will get even tougher now. Readers are reminded that the Hellenic Financial Stability Facility recently committed 18 billion euros in EFSF bonds to cover the future share capital exercises of the country’s four largest local credit institutions and make it possible for them to function properly. Greek banks have suffered huge losses from their participation in the biggest sovereign debt restructuring in history and bad loans, given that the Greek recession entered its fifth year in 2012.

One would also expect the Achilles heel of the Greek banks, namely deposit hemorrhage, to show up once again with ordinary people withdrawing money as soon as on Monday. Needless to say, deposit flight and withdrawals can lead to serious problems although one would expect the ECB and the Greek central bank to be on high alert, providing liquidity if necessary.

However, this cannot go on forever as they have have already borrowed more than 120 billion euros by putting up collateral from both sources and the ECB may impose bigger haircuts on the collateral as we said above. It is noted history teaches banks collapse due to a lack of liquidity and not due to insufficient capital.

In addition, it is possible that some small corporate and real estate deals or other transactions will be put off until the political picture becomes clearer in the coming weeks and months.

Underlying everything is Greece’s commitment to the terms of the second bailout, which the majority of the parties entering the Parliament seem to reject outright. Readers are reminded that the next review by the representatives of the international creditors -- collectively known as the troika -- will take place in the next few weeks and Greece will have to specify a series of spending cuts amounting to 5.5 percent of GDP for the period 2013-14 by end-June to comply.

All in all, the outcome of the general elections has increased the chances that the country will not have a strong, stable government any time soon, raising political uncertainty and putting at risk Greece’s position in the euro area. Snap elections may or may not be a solution. The only certain thing is that the economic consequences of the election will become obvious shortly.

ekathimerini.com , Sunday May 6, 2012 (23:15)  
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