Historic Greek election signals tense discussions with Europe

By Tristan Hanson, Head of Asset Allocation at Ashburton Investments

On a momentous night, the radical left-wing party, Syriza, swept to a stunning victory in Sunday’s Greek elections. Vowing to leave behind “five years of humiliation and anguish”, the victory for Alexis Tsipras and his party marks the first decisive shift in power to a party openly opposed to EU austerity. The vote signals a dramatic break from the past that will send a shockwave throughout Europe.

Since Syriza narrowly failed to achieve an overall majority, in the coming days it will be necessary to find a coalition partner. Two possible contenders are the pro-European Potami or anti-austerity Independent Greeks.

All attention will now turn to negotiations between the new government and Greece’s European creditors. Syriza want to write-off a large chunk of Greek debt, end austerity and roll back various Troika-imposed measures. At the same time, they want to maintain the euro currency, a viewed supported by the vast majority of the population.

The election result therefore sets Greece on a collision course with Brussels and Berlin. The most desirable outcome from a financial stability perspective would be some form of negotiated outcome, perhaps a further extension of Greek debt maturities and an even more prolonged holiday on interest payments. A straight writedown of Greek debt is unlikely given the message it will send to other peripheral European countries.

The existing Troika bailout program expires at the end of February. An extension of this timeline would be a helpful first step towards a negotiated outcome.

A Greek exit of the euro area is not desired by anyone, but remains a risk if negotiations break down. The means by which this happens may be through the Greek banking system, which remains reliant on ECB funding. If this funding is cut off, a financial crisis would likely force Greece out of the euro.

Europe is therefore set for a tense and bumpy ride in the coming months. If negotiations turn sour, it will be essential to watch for signs of contagion to other countries such as Italy and Spain (itself with a strongly rising left wing party (Podemos) and elections later in the year). Syriza are an untested force and many of their policies look incoherent. However, in many ways their victory can be viewed positively. The rise of this hitherto fringe party is a wake-up call to the failed austerity policies of the EU and Greek voters have emphatically rejected the status quo.

A newly elected government offers hope in Greece, although the economic challenges remain enormous. Reforms might be better achieved by the Left, as in Brazil under Lula. Burdened by crippling debt, it is right for Greece to push for whatever relief it can get (as Germany benefited from in decades gone by). Some easing in the EU’s stance may help support stronger growth for the region in the future. In many ways, Europe is lucky that a very small economy has been at the forefront of developments during this debt crisis than a much larger one, such as Italy, which would have far more systemic implications.