June 18, 2012

Pro-Bailout Party Wins Greek Election

Markets not soothed; euro leaders hint at looser bailout terms

A New Democracy supporter waved a Greek flag during a rally in Athens on Friday. (Photo: AP) A New Democracy supporter waved a Greek flag during a rally in Athens on Friday. (Photo: AP)

Voters in Greece on Sunday let the world know that they were not quite ready to depart the euro. Despite the victory of the pro-bailout New Democracy party, however, markets were not appeased, worried that the country would once again fail to form a government.

Yields on Spanish and Italian bonds rose and analysts still predicted the likelihood of Athens leaving the joint currency, even as eurozone leaders hinted that they might be willing to cut Greece some slack on austerity conditions.

Reuters reported Monday that Sunday’s election saw New Democracy narrowly outpace the Syriza party of Alexis Tsipras, who had advocated tossing the bailout agreement while remaining in the euro. New Democracy took 29.7% of the vote, compared with Syriza’s 27%. Now the race is on to see whether a coalition government can be formed between New Democracy and PASOK, the party that finished third with 12.3%, and whether Syriza will be included or shoved to the side.

Antonis Samaras, head of New Democracy, was expected to meet with President Karolos Papoulias. PASOK has said it will support Samaras, but had not yet indicated whether its support would take the form of joining the government or simply offering backing in parliament.

Tsipras, meanwhile, refused on Monday to join a coalition government, and insists that he will continue to fight the bailout, which threatens the possibility that Greece will be able to form a governing coalition. All efforts to do so after Greece’s last round of elections had failed.

While world markets showed a brief surge of optimism over the results, they fell again as reality set in after only a couple of hours. Yields on Spanish 10-year bonds rose to 7.13%, above the level considered sustainable, and Italian bonds rose as well.

Analysts, both political and financial, are not sanguine on the possibility of compromise in forming a new Greek government. Citigroup analysts said the results of the election had made no fundamental changes to the situation, and continued to predict a 50%–75% likelihood that Greece would depart the euro within 12–18 months.

"The crisis has been postponed, not necessarily averted," Theodore Couloumbis, political analyst and vice president of the Athens-based think-tank ELIAMEP, said in the report. "For this government to last it has to show results. You can't continue with 50% youth unemployment and a fifth straight year of recession."

Perhaps recognizing the likelihood that unrest will continue to dog the steps of any new Greek government, European officials have begun to hint at the possibility that they will relax the terms of Greece’s bailout just a bit. Foreign Minister Guido Westerwelle of Germany said that perhaps the timing of requirements attached to Greece’s rescue program could be adjusted.

"We're ready to talk about the timeframe as we can't ignore the lost weeks and we don't want people to suffer because of that," he said in the report. Although other government officials disputed his comments, saying that Westerwelle was not presenting Berlin’s official stance on the matter and that now was not the time to give Greece “a discount,” Deputy Finance Minister Steffen Kampeter was quoted saying, "It is clear to us that Greece should not be overstrained." Kampeter is close to Chancellor Angela Merkel of Germany and normally is regarded as tightly adhering to fiscal orthodoxy.

Growth gained a stronger ally in France, meanwhile, as parliamentary elections in that country on Sunday resulted in a solid win for President Francois Hollande’s Socialists. Hollande has been a stout advocate for growth policies rather than austerity, and the election win gives him greater clout at home—and perhaps on the world stage as well. A special parliamentary session is planned for July in which Socialists intend to raise taxes on large corporations, particularly banks and energy companies.

With even Germany beginning to discuss the possibility of growth and joint euro finances, change may be in the wind. A meeting of the G20 beginning later Monday intends to address the need for growth as well, with a Canadian official saying in a Bloomberg report that leaders plan to discuss a number of measures to spur a global recovery that include deficit reduction for some countries and pledges for additional stimulus by others.

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