1. Euro Watch
Group Economics
Macro Research
Greece back from the brink Nick Kounis +31 20 343 5616
18 June 2012
The Greek election threw up the most favourable outcome that could have realistically been hoped for by the
international community and financial markets. The New Democracy party came first, increasing its margin of victory
sufficiently for it to have a majority in a possible pro-bailout coalition with the Pasok party. Financial markets will
breathe a sigh of relief given the elections could have thrown up another deadlock or even a victory for the Syriza
party. Indeed, the outcome means that the risk of a Greek euro exit has eased. However, major challenges remain. A
coalition still needs to be formed. In addition, the new government will struggle to stay on track with the current Euro-
IMF programme. More broadly, major steps are necessary at the eurozone level to protect Spain and Italy from fresh
bouts of contagion in the future. Judging by past form, European politicians tend to take their foot off the gas when the
pressure has gone. It is to be hoped that this time will prove different but there is a significant risk that progress will be
slower than hoped and that we will continue to muddle from one crisis to another.
Election likely to lead to pro-bailout coalition Greek election result
The Greek election threw up the most favourable outcome that % vote
could have realistically been hoped for by the international
35
community and financial markets. The centre-right New 30
Democracy party, which is broadly in favour of EU-IMF bail- 25
out, beat the anti-bailout Syriza party to first place. In addition, 20
15
the margin of victory, together with the 50-seat bonus for first 10
place, means that the New Democracy party would be able to 5
form a pro-bailout coalition government with the third placed 0
Pasok party. The two parties together would have a combined New Syriza Pasok Ind. Gr. Comm. Gold. Dem.
total of 162 seats, giving it a majority in the 300-seat Dem. Dawn Left
parliament. To be sure, this is far from a done-deal at this June May
stage. Pasok has been publicly stating that it wants a grand
coalition that would include the anti-bailout Syriza and Source: Greek Interior Ministry
Democratic Left parties. However, such a coalition looks to be
a non-starter, given that Syriza has ruled it out (though the Greek election result
smaller Democratic Left party may join a coalition with ND and Number of seats (total is 300)
Pasok). Tricky negotiations between the parties need to follow,
but given what is at stake, we doubt that Pasok will take the 150 129
country to a third election. So ultimately it seems likely that a 125
pro-bailout coalition will come into place. New Democracy will 100
71
now get three days to attempt to form a government. 75
50 33
20 18 17
25 12
Back from the brink, challenges ahead
The international community and financial markets will breathe 0
New Syriza Pasok Ind. Gold. Dem. Commn.
a sigh of relief given the elections could have thrown up
Dem. Greeks Dawn Left
another deadlock or even a victory for the Syriza party. Indeed,
the outcome means that the risk of a euro exit has eased.
However, major challenges remain. In particular, Greece will Source: Greek Interior Ministry
struggle to stay on track with the current Euro-IMF programme.
There is also a risk of political instability as a New Democracy-
In addition, the depth of the recession will make the budget
Pasok government would have a modest majority, which could
deficit targets difficult to achieve, while far-reaching structural
impact its effectiveness.
reforms will also be a challenge against this background.
Another debt restructuring will probably be needed, which will
involve official sector losses. This will be difficult, but other
eurozone countries will most likely be willing to be flexible as

2. 2 Euro Watch - Greece back from the brink - 18 June 2012
long as Greece shows commitment to reaching a primary Risk of contagion remains
surplus and makes convincing progress with reform. There Although the Greek election outcome should ease sovereign
were some signs of flexibility from the side of the eurozone debt tensions in the near term, the threat of contagion remains
over the weekend. Germany’s foreign minister as well as very much alive. Concerns remain about Spain and Italy,
European officials have made noises suggesting that the which could still face financing problems in the future. It
timing (if not the content) of the reforms in the agreement were remains vital that eurozone governments take profound steps
open for discussion. forward in terms of fiscal union and restoring confidence in the
banking sector. Judging by past form, European politicians
Greek government debt scenarios tend to take their foot off the gas when the pressure is off. It is
% GDP to be hoped that this time will prove different but there is a
significant risk that progress will be slower than hoped and that
180
we will remain in a muddling through scenario, with the
160 eurozone drifting from one crisis to another. The EU summit at
the end of the month will be a litmus test of the political will to
140
take a major leap forward.
120
100
10 11 12 13 14 15 16 17 18 19 20
Euro-IMF baseline assuming half of the austerity is realised
Source: ABN AMRO GE, IMF
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