Yesterday, the Athens stock exchange closed down 12.8% in the aftermath of the announcement that the government will hold a parliamentary vote next week to elect a new President. The financial markets in Greece had been on edge over this election because parliament may have to call for a new general election, if it cannot muster the necessary 180 votes to elect the President. That would give an opening for Alexis Tsipras and his party, Syriza, to come to power.
Syriza has been leading in the opinion polls, a reflection of the anger and disaffection of many Greeks toward their government. Mr. Tsipras has publicly championed a rollback of many austerity measures, writing off a large portion of government debt and boosting public spending as the way to lift the economy. Financial markets are horrified at the prospect of Syriza taking control of the government since these measures would require Greece to exit the euro.
The parliamentary election was originally scheduled to take place in March. The decision to move up the election by three months follows the granting of a two-month bailout extension to Greece by EU finance ministers. During this period, Greece intends to complete negotiations with the troika for its bailout exit, including possibly finalizing a back-up credit facility upon which it can draw if it is unable to raise debt in the public markets. The bailout extension combined with the move-up of the parliamentary elections will allow the government to resolve the political uncertainty, which will open the way for an exit of the bailout later this year. It is rightly seen as a risky but bold move by the country's leaders to resolve this latest threat to Greece's economic recovery.
Mr. Tsipras and Syriza undoubtedly see this as their chance to assume the leadership of the Greek government. Their popularity has been fed by the anger of many Greeks about current economic conditions. As the Greek economy continues to improve, however, much of this negative sentiment will eventually subside. If Syriza does not act now, it might lose its best chance to win in the general elections.
Yet, there is significant risk for Syriza in trying to force a general election now. It will be seen by many as an effort to disrupt the negotiations over the bailout program exit. Many members of parliament, outside of Syriza, believe that this is a time for all parties to come together to ensure that Greece can leave the bailout program as quickly as possible.
With only 28% support in the polls, it is hard to imagine that Syriza would come to power and convince a majority of members of parliament to pass legislation to exit the euro. It would be more practical and advantageous for Mr. Tsipras, in my view, to support a timely end to the bailout program and promise no major changes to existing programs as long as the suffering of the people is steadily reduced as the Greek economy continues to improve.
If Mr. Tsipras is successful in forcing a general election, there is no guarantee that he would be able to assemble a coalition to govern the country. Former Prime Minister George Papandreou has expressed an interest in assuming the leadership of his party, Pasok, once again. Some political observers in Greece believe that his reemergence could help Pasok double its support from about 5% of the vote currently to 10%, perhaps even taking some support away from Syriza. If Mr. Tsipras continues to be seen as disruptive, the New Democracy-Pasok coalition might still be able to command enough votes to form a new government. On the other hand, Mr. Papandreou also has said that he might be willing to form a coalition with Syriza, but that probably would require Mr. Tsipras backing away from his incendiary positions and moving more toward the middle ground, so that the country can continue on its recovery path.
Greece has made a lot of progress over the past four years, but there is still a lot more to do. Its success depends on a sustained global economic recovery, especially in Europe. Although this new round of political maneuvering is disconcerting, it is highly likely, in my view, that the country will avoid this potential setback to its economic recovery and restructuring efforts. A successful resolution to this political crisis will pave the way for the country to exit its bailout program later this year.
Consequently, yesterday's sell-off looks like a buying opportunity. The Global X FTSE Greece 20 ETF (NYSEARCA:GREK) is down 11.7% over the past two days (and also down 40% from its mid-March high). Shares of the Greek banks have also been hit hard, with National Bank of Greece (NBG) down 13.7% and Piraeus Bank (OTCPK:BPIRY) down 14.8% over the past two days. Shares of both of these banks are down nearly 60% from their 2014 highs. Conceivably, this crisis could be over on Dec. 17 if parliament elects a new President, but it could take some time to resolve if the votes are not there in this first go-around. A snap general election cannot be ruled out. Nevertheless, I believe that the chances are good that this crisis will get resolved within the next two months and that Greece will show more progress as the global economy continues to recover.
Disclosure: The author is long NBG.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
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