Political saga is harming liquidity

Greece is likely to hold snap elections in early February, extending the period of political uncertainty for another month-and-a-half, if not more. This will have economic consequences, perhaps leading to a downward revision of GDP growth next year and more austerity measures if the official lenders insist on Greece meeting the fiscal targets. In this context, liquidity conditions will play an important role and current trends are not favorable.

At this point, the odds are against the governing coalition securing 180 votes in the third round of voting in Parliament on December 29 to elect a new president. Therefore, the country is likely to hold early elections on January 25, or on February 1 or 8. Leftist party SYRIZA has a clear lead in the polls and is pegged to win the elections, though a month is a long time in politics and many things can happen.

It is also apparent that some people close to Prime Minister Antonis Samaras seem to prefer this route, thinking either that the conservatives can make a comeback and win by highlighting the risks of a SYRIZA victory or stop SYRIZA from winning an outright majority in Parliament. In the latter case, they think SYRIZA’s economic policy will lead to a stalemate and voter disillusionment, resulting in what has been called “a leftist parenthesis,” or an interlude.

There is no doubt that the coalition government has not pushed hard to complete the remaining reforms since elections for the European Parliament last May. The cabinet reshuffle back in June contributed to this effect. Of course, the conservatives complain they could not pass reform legislation through Parliament because deputies from junior PASOK partner opposed it on many occasions. Conservative New Democracy party has 127 seats and PASOK has 28, totaling 155 seats in the 300-seat Parliament.

Lack of substantial progress in reforms weakened the position of the government in the subsequent negotiations with the troika. The wrong attitude of some members of the Greek delegation and serious mistakes in communicating the plan for an early exit of the IMF from the Greek program to the markets compounded the problems.

It is noted that German Chancellor Angela Merkel reportedly did not object to the plan when Prime Minister Antonis Samaras presented it to her during his visit to Berlin in October, but Finance Minister Wolfgang Schaeuble did, seeking to engage the IMF, putting the last nail in the coffin of the Greek plan and paving the way for what we have been witnessing in domestic politics since then. Some observers call it the second major mistake by soft-spoken Schaeuble after he pushed for the restructuring of the Greek public debt (PSI) in early 2012.

It is further noted that Schaeuble also objected to Portugal’s exit from the adjustment program but Merkel sided with the rest in the EU and Lisbon was given the green light, according to a German source.

Back on the domestic economic scene, the impact of political uncertainty is expected to demonstrate itself once again on the fiscal side with tax revenues missing the target in December again, after doing do last month. Its effect on economic activity will gradually become obvious, assuming the fluid political environment persists, via tighter liquidity conditions. So far, intergovernmental borrowing through repo operations has enabled the state to function without the loans from the EFSF and the IMF. A high-ranking government official told us last week the state had drawn on excess liquidity of 7 to 9 billion euros from general government subsectors, i.e. social security funds. Excess liquidity amounted to about 12 billion euros last September, according to a government source.

However, it is obvious that the whole amount cannot be used by the state since the general government entities may require a part for their own needs. The state also recently borrowed an additional 1.6 billion euros by issuing treasury bills, taking advantage of the gap created when it exchanged T-bills worth 1.6 billion euros with 3- and 5-year bonds last September. However, these repo operations and T-bill issues offer only temporary relief. The moment of truth will come sooner or later if Greece gets no official loans, has no access to the markets and fiscal performance is hampered by politics.

One should also seriously take into account the warning by Bank of Greece Governor Yannis Stournaras last week that liquidity in the market is getting tighter. The local banks benefit by the ECB’s decision to decrease the haircut imposed on Greek collateral during refinancing operations, but bond prices have also fallen sharply in the last few months, limiting the impact. Moreover, large corporations have also been cut off from capital markets and there is no official data on bank deposits. Some bankers predict liquidity conditions will tighten considerably in the next few months if political uncertainty persists. They warn that tighter liquidity could hamper transactions and hurt economic activity, leading to more arrears as companies and individuals increase precautionary savings.

The economic outfall of the ongoing political saga is difficult to gauge at this point but current liquidity trends and revenue performance are not encouraging. There is little doubt the economy will be adversely affected if the liquidity trend is not reversed since Greece will likely face a bigger fiscal gap and more austerity measures to close it.