Greek Elections Are No Panacea

Here is S&P’s view of the elections in Greece. The bottom line is that they are nonplussed. You have Germany on the one hand opposed to ameliorating the austerity conditions imposed on Greece and on the other hand what may be a leaderless Greece, depending on what kind of coalition they are able to form. If New Democracy cannot achieve some concessions from its eurozone partners, then any coalition that includes Syriza will probably fail, leading to new elections.

LONDON (Standard & Poor’s) June 18, 2012–Standard & Poor’s Ratings Services said today that its sovereign credit ratings and outlook on the Hellenic Republic (Greece; CCC/Stable/C) are not affected by the outcome of yesterday’s general elections.

Provisional results indicate that the centre-right New Democracy (ND) party won about 30% of votes, followed by the left Syriza coalition with about 27%, and centre-left Panhellenic Socialist Movement (PASOK) party with about 12%. The parties are now negotiating the formation of a coalition government to achieve the parliamentary majority needed to govern.

In our view, a common goal of the parties most likely to form a viable coalition will be to modify Greece’s current program of external financial support (the program) from the “troika”–the International Monetary Fund, members of the European Economic and Monetary Union (EMU or eurozone), and the European Central Bank. We expect the government (likely led by the ND) will attempt to renegotiate program terms with the troika. However, the willingness of the latter to concede further easing of the program conditions is, in our view, constrained by opposition from several eurozone members.

If the new government can comply with the program conditions, thereby implementing the economic reform agenda, we would expect official financial assistance to continue. However, if the political parties are unable to form a viable coalition, likely leading to another round of general elections in July, or if official creditors, especially eurozone members, are unwilling to renegotiate the conditions of the program, we think disbursements to Greece would likely be suspended. This would lead quickly to Greece defaulting on its sovereign debt.

A failure by Greece to comply with a renegotiated program would also likely trigger a suspension of payments. We also think that if a coalition is formed, the coalition’s political resolve will be challenged by trade unions and other affected constituencies.

While we believe the short-term risk of Greece leaving the eurozone may have lessened, we maintain our view that there remains at least a one-in-three chance of its exit in the medium-to-long term.