Political tumult in Greece, plunging stock and bond markets, the threat of default and exit from the euro: the script is eerily similar to the nightmare scenarios of 2010 and 2011.
Debt-infested Greece skidded close to the edge then, saved by 240 billion euros ($297 billion) in emergency loans improvised by European governments led by a reluctant Germany. Now, after achieving some signs of economic recovery, the government in Athens is again teetering, provoking a fresh round of doomsday speculation.
Investors ran through the worst-case options this week, as they contemplated a chain of events starting with a deadlocked presidential election this month that could bring anti-bailout forces to power, putting Greece’s status in the euro back into question.
“Europe’s not out of the woods yet,” Peter Fisher, a former U.S. Treasury and Federal Reserve official who is now senior director at the BlackRock Investment Institute, said on Bloomberg Television late yesterday. “They’ve got a long way to go to create a real monetary and capital markets union.”
Greek stocks dropped 1 percent yesterday after the benchmark Athens Stock Exchange Index plunged 13 percent the previous day, the steepest fall since 1987. Ten-year bond yields soared again after jumping 93 basis points to 8.18 percent on Dec. 9, roughly where they were in April 2010 during negotiations on the first bailout.
To be sure, the European Union is better prepared now than in 2010, when a 20 billion-euro hole in the Greek budget evolved into a continental crisis that claimed Ireland, Portugal, Spain and Cyprus as victims, and nearly splintered the now 18-nation euro.
Back then, aid funds like the European Financial Stability Facility and European Stability Mechanism didn’t exist. Neither did the European Commission’s intrusive monitoring system, designed to flash red when a country is headed for economic or fiscal trouble.
Most important, European leaders bred to see the euro as permanent and indissoluble were blindsided by the crisis. Don’t “overrate” Greece’s woes, German Chancellor Angela Merkel said in December 2009 as the budgetary bad news was trickling out of Athens. “There are deficits in other parts of the world as well.”
Europe’s stewards received a lesson in crisis management and the whims of markets, and can point to success stories since. Ireland, Portugal and Spain have been weaned off aid, and the sums in dispute with Greece — roughly 7 billion euros — are small change compared to what it swallowed before.
The euro’s survival intact isn’t proof that Europe’s stewards found the right long-term recipe. Bailouts went only to governments that made drastic budget cuts, driving up unemployment — Greece’s rate is now 25.9 percent — and fueling radical politics.
In Greece, the backlash has a name: Alexis Tsipras, head of the Syriza party, who made a first, failed run at the job of prime minister in 2012 by denouncing the cuts in the public welfare system imposed by creditors. Since then, his stock has been rising. Polls consistently rank Syriza as Greece’s most popular party, and the most likely to form the next government.
“The risk of having parties with an anti-Europe agenda close to snatching power is not a risk exclusive to Greece,” Maltese Finance Minister Edward Scicluna said in an interview in Brussels. “We have seen this happen in other countries too.”
Greece could start down that path on Dec. 17, when Prime Minister Antonis Samaras puts his candidate for the largely ceremonial presidency, Stavros Dimas, to a vote in the 300-seat parliament. Samaras’s coalition has only 155 seats, making it likely that Dimas, a former European commissioner, will fall short of the 200-vote supermajority then and in a second round on Dec. 23.
The do-or-die moment will probably come in a third round, on Dec. 29, with the bar lowered to 180 votes. Under Greece’s constitution, Samaras’s failure to get his man past that hurdle would trigger fresh parliamentary elections, probably in late January or early February.
European leaders, used to Greek political gambles like an aborted referendum on staying in the euro in 2011 and two rounds of elections the following year, professed faith in Samaras, himself a bailout doubter until assuming power in 2012.
“He knows where he’s going,” EU Economic Commissioner Pierre Moscovici told reporters Dec. 9, after Greece was given two extra months to qualify for the final slice of aid loans. “If Prime Minister Samaras chose this way, it’s because he’s confident in his capacity to have a successful election of the president.”
A defeat and the ensuing national elections would compress the political and crisis management timelines. Greece’s voting system gives Tsipras an outside shot of winning an absolute majority in parliament. Failing that, he would be mired in coalition talks in parallel with efforts to secure the remaining bailout loans by the new Feb. 28 deadline.
And yet it might not get to that stage. Some on the ground, such as Andreas Kontogouris from Athens-based Beta Securities, say that Samaras will get his 180 votes on Dec. 29. Even if not, and Syriza goes on to win the subsequent election, says Kontogouris, Tspiras won’t be as radical as his rhetoric implies.
“There are no magic solutions for Greece,” Andreas Antoniades, a senior lecturer in political economy at the University of Sussex in the U.K., said by telephone. “But the snap presidential elections will hopefully force all political forces to rethink what the main problem is.”
Set Off Tripwires
A standoff between a rudderless or Tsipras-led government and European creditors would catapult Greece through a number of tripwires. Casualties would include Greece’s commercial banks, relying as of late October on 44 billion euros of life-support money from the European Central Bank.
Comforted by Greece’s binding arrangements with creditors, the ECB has bent its rules and allows the banks to put up junk- rated collateral. A breakdown of the aid package under Syriza might prompt the ECB to pull out, leaving Greek banks reliant on more expensive funding from their own central bank.
Not for the first time, European governments would look to the ECB as the ultimate guardian of Greece and the euro.
“We have been solving these issues through unifying our policies in Europe and also assuming that our European Central Bank must have a much more active and assertive way to fight this crisis,” Portuguese Economy Minister Antonio Pires de Lima said in a Bloomberg Television interview in New York.