The second review of the third bailout program will likely conclude in May. However, Greece will have to face a fragile and agitated political environment until 2020.
There is one economic and three political facts that will define the political developments for the next two years at least.
The first (economic) fact is that the current bailout program (third MoU) ends in August 2018. Greece needs additional financial aid, and the institutions have already forced Greece to undertake measures for 2019 and 2020.
The second (political) reason considers that the next regular national elections are planned for 2019.
The third (political) reason is that Greece will elect the President of Hellenic Republic in 2020.
The fourth (political) reason is that a new election law becomes effective after one election round. This means that if this government decides elections in 2019, the next government will go for elections with the new law. The new one does not support the first party with additional MPs (bonus), and it is more proportional and helps smaller parties to enter the government and elect more MPs. Take a note of this point because it will be used later in this analysis.
The above reasons increase the probability of early elections in 2018 (end of the current program) and political instability until 2020. Why?
In our understanding, now, there is no reason for SYRIZA to decide elections before it records the lowest percentages from the time it undertook the government. Also, the rational option for the current government is to go for elections before 2019, when it is obliged to decide further reductions in pensions according to the decision of the latest Eurogroup (it will be included in the supplementary MoU, after the conclusion of the second review). Thus, the best solution is considered sometime before the current MoU expires.
However, the early elections will not solve the problems, nor reduce the political instabilities.
The new government after the elections in 2018 (likely New Democracy) will have to implement tough measures (additional austerity measures of 3.6 billion Euros by reducing pensions and increasing personal taxation) in 2019 and 2020, i.e. the first two years of its government. This tough political situation will give the opportunity to SYRIZA to revive its percentages, and it may gain the opportunity to trigger new elections ahead of the elections of the President of the Hellenic Republic. This is possible because the new government after the elections of 2018 will either have a weak majority, or it will be supported by other parties. Thus, it may be difficult for New Democracy to elect a new president. Furthermore, the tough measures may harm the support of the other parties to New Democracy.
Furthermore, there is one significant reason for new elections in 2019 or 2020. This is the new election law. SYRIZA and other small parties, as well as junior parties that supported New Democracy, would like to go for elections with the new law because they will increase their MPs in the parliament. Thus, they will not have a reason to support New Democracy in electing a new president.
New Democracy is preparing for this scenario, but it is not sure that it will happen. New Democracy is set to change the election law once it takes the government. According to the Greek Constitution, the new law will become effective after the next election if the Government votes for it with a great majority (i.e. over 180 MPs). It is considered rather difficult, even if it is supported by smaller parties because the latter would not like to change the law. Otherwise, New Democracy can pass the new law with an absolute majority (e.g. 151 MPs), but the change will become effective after the election after next.
As a conclusion, we foresee a nervous political environment and political instability in the next two years, which may further harm the Greek economy and the credibility of Greece. The implementation of the new MoU (we assume that a new financial support will be designed for the years after the end of the current program) will become difficult and likely inefficient.
In our view, all the above consists of our baseline scenario.
The best case scenario foresees that the New Government, after the elections in 2018, will gain a solid majority that will allow the implementation of the measures, the change of the election law, and the ability to go for elections after four years in 2024. This will give the new government the appropriate time to “capitalise” the benefits of the first two tough years of its governance.
The worst case scenario includes political instability (as the baseline scenario) with geopolitical developments. These developments in conjunction with the failure of Greece to exit the need of continuing support from the Eurozone and the IMF may trigger anti-Europe reflections in Greece. At the same time, the Eurozone may consider that the Greek problem cannot be solved by MoUs and additional financing. Then, the Eurozone should decide between a debt “forgiveness” or “Grexit”, which may be supported by the Greek people too. The likelihood of the worst case scenario may increase if anti-euro forces continue to increase in Italy, etc.
In our view, the period until 2020 is also very critical for the Greek economy, because if the country fails to implement tough measures and reforms, Greece will likely face financing problems again in 2024-2025. These years are considered by the IMF to be critical for the debt sustainability of Greece. There is a turning point there. Greece should start creating dynamics for reducing its debt from 2022 onward (and accelerate the reduction after 2024). Thus, the Eurozone’s decision for the debt relief after 2018 is key for the Greek debt sustainability and the avoidance of a new bailout program to finance its needs and overtake the testing point for its debt in 2024-2025. A fifth bailout program is considered difficult.
Although default or Grexit are not included in the baseline scenario of the majority of analysts, we continue to retain high probabilities for the period until 2025.
The following figures illustrate the latest IMF’s and the ESM’s debt sustainability analysis (figures 1 and 2). In figures 3 and 4, Eurobank compares the above debt analysis and tests the financing needs of Greece under the current debt relief (ESM’s) assumptions.
17: The IMF releases updated projections for the global economy (including Greece).
20: 1.35 billion Euros to the ECB.
21: ELSTAT will release its fiscal report for 2016.
21-23: IMF/World Bank Spring Meetings: There will be discussions at the highest level between the Fund and the European partners (reportedly also between German FinMin Wolfgang Schaeuble and IMF Managing Director Christine Lagarde) regarding the medium-term debt relief measures for Greece to be implemented after the completion of the 3rd Economic Adjustment Programme in 2018.
24: The Eurostat’s excessive deficit procedure statistics are due for release, which could open the way for the IMF’s participation in the programme.
27: ECB monetary policy meeting.
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