Greek outcome scenarios: coalition to exit from euro

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Key questions on Greece’s elections today and a list of possible outcomes after the vote follow. There are 9.9 million citizens eligible to vote in the election and polls shut at 7pm in Athens.

Who’s likely to win?

The last date voter opinion polls were allowed to be made public was June 1. On that date, New Democracy led with 22.7 percent, Syriza had 22 percent and Pasok 11.2 percent. The maximum margin of error in the survey was 2.8 percentage points. The poll of 1 200 people was done by Metron Analysis on May 30 and 31.

What have the three main party leaders said they’ll do after the election?

- New Democracy – Antonis Samaras says the parties “must find common ground” to avoid a third election or a euro exit. His conditions for co-operation are “staying in Europe and the need to renegotiate the bailout to cater for growth”.

- Syriza – Alexis Tsipras says European officials wouldn’t push Greece out of the euro even if he fulfilled his pledge to cancel austerity measures.

- Pasok – Evangelos Venizelos has sent rival party leaders a framework for a coalition to avoid paralysis and says that a Greek government must attend the EU summit at month-end.

Possible vote outcomes?

If there’s no clear winner, the parties will have to negotiate to form a coalition. The legislature has 300 seats, and 151 seats are needed to form a government. Once election results are known, the largest party automatically gets an extra 50 seats, and the coalition bargaining begins.

Bank of America Merrill Lynch lists these potential outcomes from negotiations:

- A victorious New Democracy forms a coalition with Pasok. The key is whether, combined, they’ve won at least 151 seats. If so, they’ll co-govern and no smaller party will have incentive to join and share the political pain of implementing reforms. If not, they’ll need to fold in a smaller party, which may be more likely to assent as the pressure is greater to agree this time around.

- A triumphant Syriza will try to form a coalition, but it will be “hard pressed” to do so. It would have to sign up New Democracy or Pasok in order to govern, but to do so it would have to make some commitment to follow through with the Troika programme, the opposite of its election campaign.

What will happen after a government is formed?

Goldman Sachs says there are three possibilities:

- Muddling through (most likely): Greece seeks to stay in the euro but doesn’t agree to unconditionally implement the reform plan. The most likely consequence is that the Troika ceases payments, though banks continue to receive European Central Bank (ECB) support unless a political decision is made to withdraw central bank facilities. Greek membership in the euro depends on its ability to adjust to new incentives as the threat of exclusion from the bloc gains credibility.

- Slow exit (next most likely): Greece is excluded from the zone after the remaining members are given time to build firewalls against shock, such as deposit guarantees and liquidity injections by the ECB. While there isn’t a legal mechanism for exclusion, it could be done in practice by cutting Greek banks off from ECB facilities and payments systems. For the rest of the zone, the firewalls are unlikely to be robust enough to deal with the knock of the Greek exit, while there may be market fallout as the new precedent that euro membership can be rescinded, Goldman says.

- Fast exit (least likely): Greece abandons the euro and introduces a new currency. A “sudden and abrupt” exit wouldn’t give other nations time to prepare and an insufficient firewall could mean an unravelling of the euro area.

What if the parties can’t agree to form a government?

The Greek constitution says that when a coalition can’t be formed, the president must broker a government of national unity, and if that can’t be done, new elections must be held.

This is what happened after the May 6 election.

Bank of America says were Syriza to fail to form a coalition a third election would follow in which Greece would run out of money, the Troika would stop providing funds, and the ECB’s support for Greek banks would be at risk. The economic damage suffered during this period would require a new plan negotiated with the Troika, with more funds.

Will Greece exit the euro?

Citigroup said even under a New Democracy-led government, Greece’s problems are so challenging there’s a 50 percent to 75 percent chance it will get pushed out in the next year or two. That would happen sooner under a Syriza-led government.

Aviva says the chances of no exit and Greece “muddling through,” or a managed exit from the common unit, are both 40 percent. There was a 20 percent chance of a disorderly exit.

Berenberg Bank’s Holger Schmieding says European officials seem “ready to reward a responsible Greek government”, and the election is “too close to call”. He gives these scenarios:

n A New Democracy win and a coalition with Pasok will coax Germany to overlook doubts on Greece and allow Europe to adjust the bailout plan and even possibly add to support. In this case, the probability of Greece being in the euro by the end of 2012 is 75 percent.

n A Syriza win would probably see the EU demand that Tsipras sign up to the bailout plan or be cut off from EU and central bank support. Loss of funds would lead to a bank run and “the threat of utter chaos.” Among Tsipras’s options are relenting and signing up to the Troika terms or standing his ground and causing a “chaotic” exit. He may negotiate a semi-orderly exit. Under a Syriza victory, Berenberg puts the probability of Greece being in the euro by December at 30 percent.

n An inconclusive election result that requires a third vote will put the probability that Greece is in the euro at the end of the year at 50 percent or less.

How much time would Greece have to arrange its affairs were it to exit fast?

Assuming the decision were to come at the end of foreign currency trading in New York on a Friday, it might have 46 hours to get its affairs in order before trade opens in New Zealand on the Monday. In that time, officials might have to manage a potential sovereign default, plan a new currency, plan to recapitalise banks, stem the outflow of capital and seek ways to pay bills once the bailout lifeline is cut, economists say.

Can Europe stand an exit?

German Finance Minister Wolfgang Schaeuble says the euro region would be able to cope better with a Greek exit now than a year ago. While a departure would trigger a crippling devaluation, such a scenario would be manageable.

Swiss professor James Davis says contagion from a Greek exit poses a bigger threat to the EU than the exit itself.

Gabriel Stein, a director at Lombard Street Research, says the history of monetary unions, including the breakup of the Soviet Union, shows that they “can dissolve, and it is not the end of the world”. Still, “the history of other monetary unions confirms that, without a fiscal union, a monetary union will not last”, he added.

Possible market reactions?

Aviva says no matter what happens, turbulence awaits.

n In a managed exit, stocks would drop 15 percent, though a response by officials to contain contagion would then produce a rally of up to 30 percent, and the euro would settle at the mid-$1.20s (about R12.70).

n In a disorderly exit, Aviva forecasts that stocks would fall 30 percent, below lows reached in 2009, and the euro would weaken to $1.10.

Alternatives to a full exit?

Deutsche Bank’s Thomas Mayer says that the Troika could stop payments to Greece if it refused to implement the programme. A Greek parallel unit to the euro, which Mayer calls a “Geuro”, could emerge as the government issues IOUs to meet payment obligations.

That would allow Greece to devalue without formally exiting Europe’s monetary union and “keep the door open to a future return to the euro”, Mayer said. – Jennifer Ryan from Bloomberg