German Chancellor Angela Merkel and her Vice Chancellor were presumably not giggling over Greek portmanteaus during the German Parliament’s debate on Greece’s bailout Wednesday. Photo by Adam Berry/Getty Images.
Well, don’t look now, but Greece finalized its bailout Wednesday, when Germany’s parliament ratified the deal and the Dutch government defeated an attempt to block it. Eurozone finance ministers gave it one last rubberstamp, and a tidy sum of €23 billion—the first tranche of an €86 billion loan—is on its way to Athens, which will use the money to repay the ECB and IMF, clear government arrears and recapitalize banks. Elsewhere in this Greek week, bank deposits began trickling back in, capital controls eased a tad, and the government (sort of) privatized 14 airports, another key step to meeting bailout terms. So things are going well! For now, that is. We, like most of the world, would love it to be all quiet on the Grecian front, giving markets a break from perpetual crisis mentality.[i] But we aren’t quite there yet, as there are a few speedbumps ahead, any of which could cause another flare-up and perhaps roil investors a bit.
The first speed bump has already hit: That privatization we mentioned just now isn’t quite final. On Tuesday, Greece’s government announced it leased operations of 14 regional airports to a consortium led by Germany’s Fraport AG and Greece’s Copelouzos Group, in exchange for €1.2 billion. The previous government did most of the heavy lifting last year, but after his Syriza party won January’s elections, Prime Minister Alexis Tsipras put it and all other pending privatizations on ice—officially to “review” them, unofficially because the leftist party ideologically opposes privatization. But sealing the bailout required Tsipras to U-turn and privatize €50 billion worth of assets, so he approved the sale—Syriza’s first. Trouble is, Fraport wants to renegotiate, implying it needs a sweeter deal and more guarantees to compensate for Greece’s heightened political uncertainty and the economic damage from nearly two months of capital controls. In response, the government basically said ok fine, but then we have some things we want to renegotiate too, which is tantamount to starting from scratch. At the risk of stating the obvious, this could easily run aground[ii], resurrecting questions about Greece’s commitment to the bailout’s terms.
Ideally, Greece would make concrete progress on this and several other reforms by October, when creditors conduct their first review of the program and open talks on debt relief—the IMF’s main condition for joining the program. The more Greece accomplishes, the more willing eurozone governments will be to extend maturities and slash interest rates on Greece’s outstanding debts—and the greater the likelihood the IMF signs on. The more Tsipras and his ministers dither, the greater the risk the fragile agreement falls through. Compounding matters, ministers are trying to devise alternatives to some of the bailout’s more politically charged conditions, including pension reforms, which could open a fresh front in negotiations with the “quartet” of creditors.
Politics add another wrinkle—perhaps the biggest wrinkle of all. When Tsipras rammed the bailout (and two rounds of preconditions) through Parliament, nearly one-third of Syriza rebelled, forcing him to rely on opposition votes. Opposition leaders have said they’re done propping him up, and Syriza’s far-left faction, the Left Platform, is inches away from officially splintering off. So Tsipras is in a pickle: He has lost his majority in Parliament but must pass another raft of contentious reforms by the end of September, leaving him with precious few options. One rumor this week said he might shift Parliament to a “summer session,” reducing the number of legislators from 300 to 100, allowing him to send the rebels off on an island vacation while the loyalists pass what’s needed. But by Wednesday, party insiders told Greece’s Kathimerini newspaper Tsipras is leaning toward calling snap elections, either in September or October. Waiting would let him show creditors he’s putting reform ahead of politicking, which might score brownie points. But holding an earlier contest raises his chances of winning a majority—the longer he waits, the more time higher taxes have to dent Greek wallets and his popularity. For now, his poll numbers are soaring, but Teflon coats don’t last forever. (Editors' note: Tsipras dissolved Parliament on Thursday and asked President Prokopis Pavlopoulos to schedule elections, which will likely occur on September 20. Supreme Court President Vassiliki Thanou-Christophilou will step in as interim Prime Minister during the campaign, which Tsipras will lead for Syriza in an attempt to win a stronger pro-bailout backing.)
In short, political uncertainty abounds, and any election is impossible to handicap. It could give Tsipras a stronger mandate with a more loyal backing in Parliament. Or it could land the Left Platform and other fringe parties more seats, forcing Syriza to form a fractious coalition that can’t get anything done. So we could easily be back here in six months or a year writing about political instability, impatient creditors and impending “Grexit” risk.
So we haven’t heard the last of Greece. If you find this saga as entertaining as we do, you might think this is good news.[iii] If you’re tired of the theatrical headlines and Greece-induced volatility, you are probably heaving a heavy sigh, and we’re right there with you. We’re pretty sure markets would welcome a break. But the good news is markets don’t need a “Grexit” catharsis or a flawlessly implemented bailout deal to do great. Either would be nice! But not necessary. Greece’s woes and can-kicking have been part of this bull market’s backdrop for more than five years. Stocks have proven their resilience.
[i] For global stocks, this is probably the second-best outcome, following “Grexit.” Counter-intuitive as it seems, we think Greece leaving the euro would be a cathartic moment for investors, allowing them to get over the false fear. That would probably boost sentiment greatly.
[ii] Yes, it’s a little odd we used a maritime term in a passage about airports, but the air industry version has a specific meaning in investing that we don’t wish to impart.