As Greek voters prepare to go to the polls on Sunday, we are approaching a pivotal stage in the sovereign-debt crisis—and, perhaps, in the post-war history of European economic and political integration.
If Greece elects a government that rejects the terms of the European Union/International Monetary Fund bailout, then it is almost certainly on a one-way path out of the euro area. A Greek exit, even if carefully managed, would shatter the myth that euro-area currencies have been irrevocably fixed, and send shockwaves through the region’s financial system. Greece’s euro-area partners will, of course, emit a huge sigh of relief if it elects a pro-bailout government. But they would still have a rocky path ahead of them.
The election result remains too close to call. Most opinion polls show the centre-right New Democracy (ND) party in the lead. That would make it eligible for the 50-seat bonus awarded to the largest party in the 300-seat parliament, sufficient to form a majority coalition government with the weaker centre-left PASOK party. But ND’s average lead over the radical-left Syriza party was less than 1% in the polls—much too close for comfort.
The debate has been complicated by last weekend’s Spanish bank recapitalization. The mainstream parties have used this to argue that the rest of the euro area will adopt a more flexible approach if Greece returns a government that signs up to the broad terms of the bailout (and also that the rest of the euro area is already preparing for a Greek exit).
But Syriza is citing the Spanish move as evidence that Greece will be able to reject the terms of the bailout, continue to receive EU/IMF funding and remain within the euro. However implausible this might seem to the outside world, it is what most Greeks want—and therefore seductive.
With so little to go on, it’s worth repeating three scenarios we discussed in more detail a few weeks ago:
1. A pro-bailout government is elected. Official financing would probably continue and there would also be an attempt to soften the pain for Greece. This is probably the best near-term outcome for markets.
2. Stalemate makes it impossible to form a government, necessitating a third election, which would become an explicit referendum on euro-area membership.
3. An anti-bailout government is elected, in which case Greece would be likely to leave the euro.
Of these scenarios, the third may be the least likely, because even if Syriza is the biggest party, it’s unclear how it will be able to form a majority government. But it’s harder to say which of the other two scenarios is more likely. The odds may slightly favour a pro-bailout government, but the threat of another inconclusive result is very real.
Even if a pro-bailout government is formed, Greece’s euro-area partners can’t afford to rest on their laurels. Markets might stabilize for a while, but it’s unrealistic to assume that the programme will suddenly start to deliver where it has so far failed. The Greek economy is imploding and the social fabric is unravelling. Tinkering with the existing programme is not enough; a radical new approach is necessary. If this doesn’t happen soon, the least-worst option for Greece may, indeed, be to leave the euro—regardless of the consequences for other euro-area countries.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.
Darren Williams is Senior European Economist at AllianceBernstein.