The European Commission is prepared for various scenarios for Greece after national elections on 25 January, but it believes that an exit of Athens from the eurozone is unlikely, Economic and Financial Affairs Commissioner Pierre Moscovici said on Monday (19 January).
“Eurozone integrity is not threatened, we don’t fear what will happen in the Greek elections on Sunday. We are prepared for all kinds of scenarios in Greece,” Moscovici told a seminar at the economic think tank Bruegel.
Greece’s left-wing opposition Syriza party is leading in the polls and is running on a pledge to end austerity policies, reverse some reforms, stop privatisation and renegotiate the country’s debt, mostly held by eurozone governments.
The ruling coalition in Greece says such policies could lead to Greece exiting the eurozone, what markets have dubbed “Grexit”.
“Whatever is the choice of the Greek people, we have answers,” Moscovici said. “We are not facing the danger of Grexit or any kind of danger.”
“The commitments of the Greek government are the commitments of the country and that pacta sunt servanda (agreements must be honoured),” he said.
Meanwhile, the idea that a Greek eurozone exit could be handled without much damage to the rest of the bloc is met with disbelief in Greek government circles.
With almost 80% of Greek debt now held by eurozone governments and the European Central Bank poised to embark upon a government bond-buying programme, the risk of contagion via the financial markets would be limited, the argument runs.
“Greece is no longer of systemic importance for the euro,” the head of the influential Ifo economics research institute Hans-Werner Sinn said, summing up the view of many conservative German policymakers.
But Prime Minister Antonis Samaras has been busy talking up the dangers of Grexit during the election campaign in an attempt to win over voters. Government officials say the risks stretch far beyond Greece’s borders and insist their view is not merely shaped by electioneering.
“Just the threat of Greece defaulting will shake up eurozone’s economies in a very fragile period,” said one senior Greek official. “Eurozone policymakers don’t have a risk management plan in place if things go crazy after the elections and that’s a mistake.”
Officials in Brussels say they are not taking the prospect lightly and say there would be unpredictable repercussions.
Given Syriza wants to stay in the eurozone, they believe there is will on all sides to make that happen. But if the situation got out of hand, unlike in 2012, there are firewalls to contain contagion. The markets mood is different, and the ECB looms large.
Some analysts say, while the risks of a repeat of the chaos seen in 2012 are minimal in the short term, the long term repercussions of a Greek eurozone exit should not be underestimated.
“A Grexit would not cause serious problems for the eurozone in the short term,” said Nikos Vettas, head of IOBE, Greece’s most influential think tank.
“In the medium term however, it would pose the question as to whether there is cohesion within the euro zone and if the ultimate aim of integration is attainable.”
Despite more robust financial defences, the departure of a eurozone member would transform what was designed as a permanent, unbreakable union into an open-ended alliance.
Colin Ellis, Moody’s chief credit officer for Europe, said the risk of a Greek exit was “materially lower” than it was in 2012, but would have unforeseeable consequences.
“Yes, contagion channels have been reduced, but European authorities would still need to act swiftly and resolutely in order to contain the pressures arising in the event of a Greek exit, because the impact would be very hard to predict.”
The warnings from Brussels and the IMF are coming thick and fast.
Commission President Jean-Claude Juncker told Reuters that any new Greek government would have to deliver on the commitments of its predecessors, and IMF chief Christine Lagarde said debt restructuring would have consequences.
“Defaulting, restructuring, changing the terms has consequences on the signature and the confidence in the signature,” she said on Monday.
The Greek government privately plays down the odds of a Grexit, but warn that a series of wrong moves could put the country close to the edge with the bailout expiring at the end of February, leaving little time for negotiation.
“We won’t have a Grexit. It’s not like in 2012, but we could get close to what happened then, especially if there are signs of a bank run,” the official said.
Signs of trouble within the banking system have already emerged in recent days, with bankers saying about €3 billion of deposits were withdrawn in December – the steepest fall since June 2012. That helped push two major Greek lenders to apply to tap emergency funding from the national central bank.
Greece’s funding obligations pose another problem. Syriza says cash reserves are enough to meet obligations of €3.5 billion over the February-March period. The government, however, has warned that state coffers could struggle if tax revenues continue to fall as they did in December.
Either way, the next government will have to negotiate an agreement to secure a final bailout tranche worth €7.2 billion or risk a funding crunch in the summer.
With Greece once again effectively shut out of debt markets after a tentative return last year, a total of €1.5 billion in principal and interest fall due in June with further payments of €4.7 billion in July and €3.6 in August.
Greece exited a painful six-year recession this year and has tapped bond markets twice after a four-year exile, but investors have begun to fear a return to the days of crisis as the presidential vote looms.
On 8 December, eurozone ministers decided to grant Greece a two-month extension to its bailout rather than settle for a six-month extension that Athens objected to, was a boost, giving the country just enough time to wrap up a delayed bailout review before it exits the programme for good.
Opinion polls show the leftist Syriza party would win if early elections were held right now.
- 25 January: General elections in Greece.
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