Be Shocked? Or be worried? French and Greek Elections7 May, 2012, 11:29. Posted by Zarathustra
Tags: Euro Crisis, France, Greece
Yesterday we had two elections going on in Europe. In France, François Hollande took the presidency over from Nicolas Sarkozy. This is not at all unexpected.
Meanwhile, mainstream political pro-European parties in Greece (e.g. New Democracy and PASOK) saw their support collapsed while parties which opposed austerity increased substantially. According to Wall Street Journal, more than 60% of the popular vote went to these parties, and the new parliament would be the most fragmented one since 1974. Financial Times said this could mean another election rather soon.
None of these are particularly surprising. With austerity which crush people’s living standard in the peripheries, just how surprised or shocked should you be when some parties with more extreme ideologies gain support while parties that accepted austerity become victims? No, not surprised at all.
Should you be worried though? Last Week, UBS said yes. “Be worried. Be very worried”, they basically called what we are seeing now.
The Greek elections are important
A central risk factor is the political landscape after the Greek general elections this Sunday. According to recent opinion polls, party political support in Greece has fragmented significantly over the last six months or so, with voters appearing to have moved support away from the two major parties (New Democracy and PASOK) in favour of the smaller parties. Many of these advocate the renegotiation of agreements with official sector creditors, a rejection of austerity measures, or even leaving the euro altogether.
Potential turmoil after the elections
Both main parties have campaigned on the idea that they will renegotiate the Memorandum of Understanding (MoU) with the IMF. In our view, that suggests a degree of liberty they do not have; we think there is little, if any, appetite at the Fund or at the EC to renegotiate the agreement. Rather, the new government’s task will be daunting: €3bn of spending cuts to implement immediately and an additional €12bn to be detailed for 2013-14. Risks have risen around Greece’s ability to implement austerity measures, against a backdrop of increasingly
frustrated and impatient official sector lenders.
Will the IMF and EU just walk away?
As a consequence of the above, we see a high risk of a temporary suspension of official sector financing. If Greece does not fulfil its commitments, we think it is entirely possible that the IMF, and in turn the EU, will simply refuse to make the next payment. However, it is unlikely in our view that payments would stop altogether – rather, they might be postponed until Greece fulfilled its obligations. This could generate considerable tension, with the Greek government quickly running out of cash and being forced to stop paying salaries and pensions. Social turmoil would almost certainly follow.
Markets are not prepared
The restructuring of Greek debt earlier this year appeared to many people to mark the end of Greece’s ability to upset other European markets. Even a temporary suspension of official sector financing could therefore be very damaging to European markets – as they consider Greece’s alternatives in the event that official funding were cut off permanently.
So the Greek issue is back, despite Standard and Poor’s upgrading Greece last week from selective default (SD) to CCC.