Fisher Investments Editorial Staff
Geopolitics, Developed Markets, Deficits

Europoliticking

By, 06/19/2012

Greeks voted Sunday, and the results are in: Bailout-friendly New Democracy (ND) and PASOK took 129 and 33 seats in the Hellenic Parliament respectively, giving them a combined majority and likely clearing the way for … more politicking.

Even with the seemingly positive election result, Greece has a tough road ahead. First, ND must reach a power-sharing deal—no small task, considering PASOK leader Evangelos Venizelos, thus far, insists on forming the broadest coalition possible. Anti-bailout Syriza has already rejected overtures, but talks continue with the Democratic Left (DL), which tentatively supports the bailout but favors freezing all wage and pension cuts. ND leader Antonis Samaras wants to cooperate with Greece’s creditors wherever possible, but he also wants the support of DL’s 17 seats. Thus, a ND, PASOK and DL coalition seems possible, but only after tense negotiations over how hard a line to take in bailout renegotiations.

Venizelos has said talks must wrap by Tuesday evening, and if they’re successful, a bailout-friendly coalition likely takes the helm. Otherwise, the mandate to form a government falls to Syriza and, failing their efforts, PASOK. That said, considering how pragmatism has dominated Samaras’s and Venizelos’s campaign rhetoric, it’s difficult to imagine either letting coalition talks break down without a tremendous fight.

But even the most pro-bailout government faces a Herculean first task: To meet bailout terms, Athens must outline €11.5 billion in fresh spending cuts by June 30. Samaras has all but admitted that’s unlikely, and he’s said renegotiating the bailout’s terms tops the agenda.

Those negotiations’ success will depend on Greece’s shortfall and EU officials’ willingness to compromise. Greece’s circumstances will be clearer once the EU, ECB and IMF complete their upcoming audit, where they’ll decide whether Greece gets the €1 billion in aid withheld after the first election. Expectations are low: Privatization efforts stalled while Greece had no government, negating the state asset-sales revenues assumed in the bailout. Revenues are further pinched by rampant tax evasion and ongoing recession, fueling rumors Greece could run out of money next month even if officials release that €1 billion (which seems likely if an ND-led government emerges). Thus, while Samaras still intends to “honor Greece’s contractual obligations,” the onus is likely on EU leaders to be flexible wherever possible.

And based on many officials’ post-election statements, compromise seems likely. Eurozone finance ministers reiterated their “commitment to assist Greece” and “exchange views with the new government on the way forward.” Belgium’s foreign minister saw “room for maneuver” on the implementation timeline, saying a 10-15 year phase-in was possible. Germany, too, seemed open to giving Greece an extension, and while the foreign minister ruled out “substantial changes” to the program, he said, “Normal citizens shouldn’t be victims, notably those which have already supported drastic cuts.” That suggests Greek voters earned a bit of a German reprieve Sunday. Even so, all agree Greece won’t get a blank check, and negotiations will likely be heated—and with German Chancellor Angela Merkel needing a win in the Bundestag’s ESM treaty vote on June 29, she may take a very tough line at first. Germany and Greece’s well-timed Euro 2012 quarterfinal match on Friday may look tame by comparison.

Greece wasn’t the only nation to vote Sunday—France did, too. In the second round of elections for the National Assembly (the legislature’s lower house), President François Hollande’s Socialist Party won 296 of 577 seats. Counting the Green party, the center-left has about 320 seats. On the surface, that may seem to give Hollande’s campaign agenda a boost—but while legislators may support new taxes on financial and energy firms, high incomes and financial transactions, markets may not. If markets reward the threat of aggressive tax policies with higher sovereign yields, Hollande may be forced to moderate.

From here, all eyes turn to the EU’s June 28-29 summit, where Greek renegotiations likely kick off and Hollande presents his €120 billion growth plan—a hodgepodge of public and private infrastructure spending he and Merkel are already negotiating. As ever, europoliticking continues. 

 

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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