Expect Little Change in Greece

It will surely be a torrid summer of uncertainty and speculation. With Spain receiving bailout funds and Cyprus and Italy next in line, the question of whether the avoidance of a Greek exit was even relevant in the longer term has yet to be determined.
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Less than three percentage points separated New Democracy (ND) and Syriza in Greece, and the markets are not celebrating for a good reason. Far from providing any kind of real guidance about what comes next, the lackluster 'victory' by ND appears only to have served to raise further question about its ability to govern, and leaves the door open to a whole host of problems that have been simmering beneath the surface -- such as whether Greece is actually capable to implementing radical reforms, and whether the country will ultimately honor its obligations to its host of debtors.

The electoral turnout was at an all-time low, with only 62 percent of registered voters actually participating, most of whom appear to have been ND and Pasok voters. A good proportion of the people chose not to participate -- with political apathy also at an all-time high. In addition, tens of thousands of Greeks live abroad and are denied the right to vote.

The 'fringe' parties did well by historical standards -- well enough, perhaps, to sway the direction of the future composition of the government -- here, there is plenty to worry about. Apart from the challenge of establishing a functional long-term government, the question of whether it will be sustainable also arises. More than likely, the first post-election coalition will be short lived, and the result will be a series of coalition governments that risks accomplishing little or nothing.

ND's small lead, with up to 129 seats in parliament (out of 300), gives it a chance to form a coalition with Pasok and possibly a third party to form a government of approximately 180 MPs. This is a crucial number, as some laws required to amend the constitution in order to pass reforms -- such as the end of permanent work status in the public sector -- require a three-fifths majority in order to be passed. It is the debate and passage of these laws that may cause the fiercest reactions among the populous in the near term.

Although it is still too early to predict the final composition of the coalition government it seems certain that the main scenario at this point is a tri-partisan government with ND, Pasok and Dimar, led by the moderate Fotis Kouvelis. Although Dimar's participation is not certain or arithmetically vital, it will likely be needed in order to demonstrate the inclusion of the leftist proportion of the electoral body, which now collectively approaches 40 percent of the total vote (that is the KKE, Syriza and Dimar), and also approaches 180 seats.

The real outcome of the election results is that the historically bi-polar system of ND and Pasok has, at least for the moment, suffered dramatically, but a new bipolar system may be emerging in its place. The center-right ND and the leftist Syriza could merge with the social-democratic Pasok. Whatever the composition of the ruling coalition, it can expect a feisty opposition -- from all political persuasions. The need for a third consecutive election round in the summer seems unlikely, but, if as expected the ruling coalition has difficulty governing and/or passing reforms, early elections will in all likelihood be required, which will effectively bring Europe back to square one.

Greek society has split in two yet again in a different way -- those who fear fundamental change and those who fear further deterioration of personal and national finances. The new government must engage in an extremely delicate balancing act, possibly pleasing few and enraging many in Greece. Europe and the rest of the world will need to have a good amount of patience to see if the government is capable of pulling a rabbit out of a hat. There is considerable question about whether Europe has the patience, or indeed the luxury of time, to find out.

The markets seem to sense that little was achieved this weekend in Greece, and rightly so. If the objective was to remove doubts about the future direction of Greece and the euro, that was certainly not achieved. While the door is open for the possibility of meaningful progress on reforms, time is not on the future governing coalition's side, nor will the other events occurring in Europe help. It will surely be a torrid summer of uncertainty and speculation. With Spain receiving bailout funds and Cyprus and Italy next in line, the question of whether the avoidance of a Greek exit was even relevant in the longer term has yet to be determined.

Daniel Wagner is CEO of Country Risk Solutions, a cross-border risk consulting firm based in Connecticut (USA), and author of the new book Managing Country Risk (www.managingcountryrisk.com). Alexis Giannoulis is a CRS research analyst and a freelance diligence and political risk analyst.

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