Alexis Tsipras has lead his Syriza party to a statistically meaningful victory in Greece’s fifth election in six years, winning about 35 per cent of the vote against 28 per cent for his conservative party opponents in New Democracy. Tsipras will form a new coalition government in a parliament that has a strong majority of pro-bailout members. A parliamentary majority of this nature isn’t the main issue. Rather it is the appointment of government ministers, who along with their departments, must demonstrate the commitment and willingness to implement the bailout programme. We will therefore have to reserve judgement as to whether the election result is meaningful until it becomes clearer if Greece has the political capacity to implement the bailout agreement, obtain new debt relief concessions, and emerge with sustainable economic growth.
The journey from a significant and euphoric Syriza election victory in January to here has been astounding. The party was elected on a programme to overhaul the way Greece was governed, attack vested interests (except its own), and rid itself of the dreaded Memorandum of Understanding, which was the eurozone-ECB-IMF bail out agreement, requiring structural reforms and austerity.
A torturous and acrimonious five months of negotiations later, Greece was experiencing capital flight on a significant scale, and had to shut the banks and impose capital controls. In early July, a referendum rejecting newly proposed bailout conditions was rejected by 61 per cent of voters. By that time, a slowly emerging economic recovery, which we now know was in progress—GDP rose by 0.1 per cent in the first quarter, and by 0.9 per cent in the second quarter—expired.
The Greek government than backpedalled and accepted a new Memorandum of Understanding for an €86bn arrangement that provided for some concessions, for example on the primary deficit targets, but was in other ways more demanding than the one electors had just rejected. The so-called Left Platform within Syriza, the hard left faction, rejected the new terms and split from the party. Tsipras called new elections, and has been returned, his popularity intact if somewhat diminished. You couldn’t write the script.
So what happens now?
The most immediate issue for Greece is, in fact, not the bail out agreement itself but the banking sector. Without confidence in the banks, it seems unlikely that any recovery can plant roots, or that therefore the commitment to the bailout agreement will endure. Greece’s four main banks have until 1st January to submit to a restructuring that would recapitalise them, and allow them to address bad debts but without recourse to the deposits of customers and corporations.
The reason this is important is because the depositors were "protected" under the terms of the recent sovereign bailout, in which some €25bn were earmarked to shore up the banks and allow them to function normally again. Separately, the Greek Parliament passed legislation, enabling new European banking regulations to come into force in 2016, featuring bailout rules that stipulate that banks seeking financial assistance must have recourse to their creditors. These are, in order, shareholders, lower priority bond holders, more important or senior bond holders, and depositors with over €100,000. Negotiations are continuing, soon with added urgency, to allow the restructuring to happen and to resolve the situation as far as depositors are concerned.
While all of this is going on, we should be braced for disappointing news on the economy after the surprisingly firm data produced for the first half of 2015. The impact of the closure of the banks, the imposition of capital controls and the continuing restrictions these impose on economic activity will surely come through in the third quarter data. Poor manufacturing data for July and August are already in the bag, and the prior quarter’s 10.6 per cent fall in business investment may only have been an hors d’oeuvre. Then, assuming the implementation of the bailout programme resumes soon after the formation and installation of a new coalition government, the consequences of agreed tax increases and spending curbs will be felt over year end and into 2016.
Optimists may point to the examples of Ireland, Spain, Portugal and most recently Italy, where the imposition of austerity and the implementation of reform programmes seem like they are starting to bear some fruit in terms of economic growth. We can’t yet judge how sustainable more recent performance will be, but a start is a start. Greece, with Syriza 2.0 shorn of its hard left faction, might be able to follow suit, in particular if an elected-again Tsipras were to leave his former self behind and adopt the style and substance of, say, Italian Prime Minister, Matteo Renzi.
Pessimists will retort that this isn’t about personalities or resolve. Greece’s debt burden is much heavier, and the adjustment it has to make, GDP having already fallen by over 25 per cent since the crisis started, far larger. In other words, without new magnanimous concessions on the terms of debt from creditors—write-offs are almost certainly not going to be offered—Greece will do well simply to run to stand still economically.
The latter make an important point. If meaningful concessions were made, or dangled as a reward for compliance, they would probably have a material, positive psychological as well as economic impact.
The former miss an important point, alluded to at the outset. That is that Greece’s fundamental flaw—reflected in the those five elections in six years in which many have had the chance and failed to turn Greece around—is the weakness of its public administration. Sadly, this and the reluctance of Greece’s creditors to be magnanimous are locked in a vicious circle.
Improving it was a key component of Syriza’s Thessaloniki programme, on which it fought the election in January. If Syriza 2.0 were able to start to address administrative, institutional and legal reforms, then the proverbial corner may well finally be turned with regard to relations with creditors and effectiveness of policies.
