Market Analysis

Greek Government Theatrics and Other Reruns

Greece has a new anti-austerity government, but a disorderly euro exit is as unlikely as ever.

Greek stocks plunged Monday and Tuesday as markets digested the anti-austerity Syriza party's triumph in Sunday's elections. With Syriza winning 149 of Parliament's 300 seats, leader Alexis Tsipras was sworn in as Prime Minister Monday. His cabinet-a coalition with the Independent Greeks-took their seats Tuesday. Together, they have 162 seats-a workable anti-austerity majority. Perhaps that is why other eurozone leaders have already started digging in against Tsipras' pledges to abandon the prior government's austerity commitments-driving renewed fears of a disorderly Greek euro exit. Outside Greece, however, stocks largely sighed. Perhaps markets are used to this after five years of stalemates between eurozone leaders and Greece. Moderation and compromise prevailed each time, which seems likely this time, too. Anything is possible, but markets move most on probabilities, and a disorderly Grexit remains unlikely.

Tsipras has a lofty wish-list, including abandoning tax hikes and spending cuts pledged by prior administrations, rehiring fired public sector workers, writing off a chunk of debt currently owed to the ECB, IMF and other official-sector creditors, and using funds earmarked for IMF and ECB debt service this year to fund a big social spending package. Creditors, predictably, aren't too keen. They're willing to talk, but they consistently say debt forgiveness is a non-starter-a message EU finance ministers reiterated Monday. Many believe the apparent stalemate, and the fact Greek banks can't continue receiving ECB support after February unless a new "memorandum" (lingo for reform commitment) is signed, will force Greece to leave the euro and print drachmas to fund banks and spending.

Now, that probably sounds dire, perhaps plausible, too. But we've seen this movie before: The IMF/ECB/EU "troika" demands full debt repayment and tough austerity, or they won't give Greece money. Greece grumbles and waffles. EU leaders remember they want to keep Greece. Greece remembers it wants to keep the euro. The troika redraws its lines in the sand. Greece's government abandons its pledges and ignores voter backlash. They compromise. Lather, rinse, repeat.

The question today is whether it's different this time. Time will tell, but the available evidence suggests it isn't. For one, Syriza has already moderated. In 2012, they were basically anti-euro. Now, they're pro-euro and simply anti-austerity. They don't want to abandon all prior commitments, as they did in 2012-just restructure debt that was left out of 2012's defaults. That isn't a revolutionary request or even unique to them. The prior government wanted it, too. Those expecting Tsipras to be radical are largely hung up on campaign rhetoric and ideological bias-usually dangerous. Recent history is full of allegedly firebrand socialists who governed as pragmatists. French President FranÇois Hollande. Former Brazilian President Luiz Inácio Lula da Silva, with whom Tsipras is already drawing comparisons. Not every self-professing leftist is Hugo Chavez. Many are just plain politicians.

Tsipras has incentive to moderate: His government isn't rock solid. It's ideologically diverse, and the only common thread is the desire to renegotiate troika terms. Syriza doesn't have uniform ideology. Its name is an acronym for "Coalition of the Radical Left," a hodgepodge of 13 smaller parties ranging from center to far-left who consolidated only a few years ago. The Independent Greeks skew to the right and oppose much of what Syriza stands for. With few common views, this coalition looks fragile, and fragile governments usually try not to rock the boat. So it's difficult to envision the new government taking a strong stand risking the euro membership 75% of Greeks support.

Eurozone leaders have an incentive to compromise, too. One, they've spent too much money and political capital keeping Greece in the euro to let it go now. Two, Populist parties are gaining ground throughout Europe. Far-left populists lead some Spanish polls with the election due by year-end. Anti-austerity populists are on the rise in Portugal, which also votes this year. Italy's government is teetering, and the euroskeptic Northern League is racking up support (the anti-establishment Five Star Movement remains popular). On one hand, eurozone leaders say they don't want to reward populists by bending to radical demands, creating the perception that the squeaky wheel gets the grease. But making some concessions to Greece shows flexibility-and maybe gives under-fire leaders elsewhere room to loosen the spigots a bit, stealing the populists' thunder. For example, while debt forgiveness may not happen, several EU leaders have suggested extending the bailout loans' maturity or adjusting interest payments. That lets them technically be steadfast while giving Greece some breathing room. Or they could grant fiscal flexibility in exchange for longer-term reform commitments. Voters may lose motivation to vote for anti-establishment candidates if establishment figures can ease unpopular terms.

But that's all speculation, and only time will tell. For now, for investors, what matters is that everyone here has incentive to compromise and a time-tested pattern to do it. That gives Greece a good chance of staying put.

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