The Greek Election: Second Time Lucky?

On May 6th 2012 Greece held a General Election. However due to the dire economic situation the vote was divided between so many small fringe parties that the country was unable to form a government. So on June 17th 2012 the Greeks will try again and go to the polls in a second General Election.

Ideally what the Greeks want to do is appoint as Prime Minister an industry insider who has an in depth knowledge of economics and the inner workings of European Union's (EU) internal politics along with an extensive network of friends and contacts in both worlds. In short the Greeks want Lucas Papademos. That Prime Minister could then appoint a cabinet of national unity made up of representatives of all of Greece's political parties including the undesirable ones like the fascist Golden Dawn Party. This combination of a technocrat and unelected political representatives would allow Greece to make the economic reforms it so desperately needs while ensuring that the genuine needs of it's people are protected without politicians being too scared to make unpopular decisions or being tempted to hand out costly bribes to ensure that their re-election.

Unfortunately the Greek people have already rejected that idea and seem intent on committing economic suicide by electing Alexis Tsipras' SYRIZA coalition. This is a man and party whose only suggestion of how to solve Greece's economic problems seems to be to use the threat of Greece leaving the Eurozone to intimidate the EU/IMF into relaxing the terms of the bailout deal so Greece can carry on with the fatally flawed economy that got them into this situation in the first place. This approach is deeply flawed for two main reasons;

Firstly while Syriza were busy boosting their popularity by childishly comparing the EU bailout to the Nazi occupation during the second world war more serious politicians in both Greece and the EU were working to identify and solve Greece's problems. This work came to fruition with the agreement of October 27th 2011. Prior to this the focus on the recovery plan for Greece was to raise government tax revenues and cut government spending in order to pay off the country' spiralling national debt. The hope was that this would convince the global debt markets that Greece could repay it's debts so they would allow the Greek government back to the market to borrow more money by 2013.

The conclusion of the October 27th meeting was that this simply would not work because no matter how much taxes increased and spending was cut Greece would never be able to pay the interest on their loans let alone re-pay the loans themselves. So instead the EU decided that it would have to negotiate with the private banks holding Greek debt on Greeks behalf to allow the country to default on 75% of it's national debt worth around Euro190bn/USD144bn. In return Greece would then make much needed structural reforms to it's economy in order to prevent a repeat of the crisis. After several months of hard negotiations the EU was finally able to get this deal done in March 2012 and Greece was allowed to walk out on the majority of it's debt.

What Alexis Tsipras and Syriza don't seem to understand is that in economics there is often a large time lag between cause and effect. For example the credit crunch occurred in late-2008 but the rise in unemployment it caused didn't start to take effect until mid-2012. So all but the most outlandish things that Syriza is demanding from the EU have already been done. It's just it's going to be 18 months to 2 years before everyday Greeks will notice the improvement. Right now though the main thing that is slowing these improvements down is Syriza.

The second problem is that Mr Tsipras' threat to take Greece out of the Eurozone and default on it's debts is nowhere near as threatening as he thinks it is. The October 27th agreement saw 75% of Greek debt written off so the vast majority of Greece's creditors along with the industry regulator the International Derivatives and Swaps Association (ISDA) already consider Greece to be in default. As it was the EU's job to negotiate this debt write off the majority of the 75% of creditors who took part were banks in Eurozone countries like France, Germany and Spain while the majority of the 25% who held onto Greek debt were institutions outside of the Eurozone who did so for political rather then economic reasons. Therefore while the "firewall" is not fully in place a further Greek default will no longer cause a domino effect of bank collapses across the Eurozone. This is why the private banks who Mr Tsipras really works for (whether he realises it or not) have been forced to apply pressure to Spain rather then Greece in order to intimidate the European Central Bank (ECB) into letting the stimulus cash flow. Today's (10/6/12) bailout for Spain showed that the Eurozone is strong enough to absorb both a Greek exit and a Spanish banking collapse. In fact a Greek exit would make the EU's job easier by freeing up the cash they were going to give to Greece and using it to further shore up Spanish and Italian banks instead.

Therefore if Greek voters are foolish enough to vote for Syriza the best case scenario they can hope for is that Mr Tsipras fails to keep a single one of his campaign promises leaving Greece meekly following the EU reform program only with a third rate Prime Minister in charge. The worst case scenario is that Mr Tsipras actually follows through on his threat and Greece defaults on it's remaining debt and then either leaves or more likely is kicked out of the Euro. The first thing that will happen then is all privately held Greek assets will lose around 2/3rds of their value. So if someone in Greece has USD30,000 in the bank overnight their savings will become worth only USD10,000. Equally a Greek mortgage holder will overnight discover that while they still owe USD300,000 their home will only be worth USD100,000. Then Greece will have to recall all the Euro banknotes and coins in circulation and replace them with new Drachmas. Conservative estimates put the cost of this process at around USD250million and I seriously doubt that Greece can afford to do this. After all they certainly don't have the cash reserves and the reason why they need EU bailout money is because private lenders have long since refused to lend the country anymore money.

So if I could vote in Greece's election no matter how tempting SYRIZA's easy promises sound I would vote for either PASOK or New Democracy.