Greece Bailout Seen in Debt With Junk Grade: Euro Credit

New Democracy Leader Antonis Samaras
Antonis Samaras, leader of Greece's main opposition New Democracy party, center. Photographer: Angelos Tzortzinis/Bloomberg

Greek voters are unlikely to give any party a workable majority in elections as soon as next month, jeopardizing austerity policies on which bailout funds depend.

Opinion surveys show as many as eight parties may win seats in the 300-member legislature. Antonis Samaras’s New Democracy leads with about 20 percent of the vote.

“All polls suggest the Greek elections won’t lead to a majority one-party government,” said Athanasios Vamvakidis, head European currency strategist at Bank of America Merrill Lynch in London. “Without a strong government in Greece that can implement the program, a disorderly default that could lead to euro exit remains a possibility.”

The rate on government bonds maturing in February 2023 climbed 122 basis points to 19.67 percent since the close on March 12, the day the securities started trading after the biggest-ever sovereign debt restructuring. Yields for Portuguese bonds due in October 2023 were at 11.44 percent, while the rate for Irish securities maturing in March 2025 was 6.97 percent. Like Greece, Portugal and Ireland required rescue funds from the European Union and International Monetary Fund.

Italy auctioned 8.5 billion euros ($11.3 billion) of Treasury bills at the lowest rate in more than a year on optimism that the euro debt woes are easing. Prime Minister Mario Monti said in Tokyo today that he doesn’t expect the “flames of crisis” to return as nations implement closer fiscal cooperation and seek to boost the region’s bailout funds.

Austerity Steps

In Greece, the pending election comes during a fifth year of economic contraction. The unemployment rate was at a record 20.7 percent in the fourth quarter. More than half of young Greeks are out of work, and pensions and wages are being lowered.

Prime Minister Lucas Papademos’s interim government has announced austerity measures equal to 20.6 billion euros, or 10 percent of gross domestic product, in 2012, according to the Bank of Greece.

No formal date has been set for Greece’s elections, with April 29 or May 6 seen by political leaders as most likely. Standard & Poor’s said March 15 it rated Greek securities CCC, its fourth rank above default, because of questionable growth prospects, a weakening political consensus and a “still large” debt burden.

Greece’s ratio of debt to GDP will fall to 116 percent in 2020 from 165 percent in 2011, assuming the country’s program to overhaul the economy is implemented, according to the IMF, which is providing 28 billion euros to the second 130 billion-euro rescue package.

Rescue Package

Political risks contribute to making the nation “accident prone,” the IMF said in a March 16 report. “Greece has little if any margin to absorb adverse shocks or program slippages,” it said.

Greece sparked the region’s crisis when former Prime Minister George Papandreou revealed in October 2009 that the country’s deficit was twice what the previous government had reported and four times the limit allowed for countries using the euro. Papandreou was forced out last November and replaced by Papademos’s caretaker government.

The EU approved the second Greek bailout on March 14 after politicians agreed to spending cuts and structural changes such as a reduction in the minimum wage, and private bondholders agreed to erase 100 billion euros from the nation’s 206 billion euros of investor-held debt.

World War II

New Democracy, the party run by 60-year-old Samaras, the former foreign minister, is the most popular among voters, three opinion polls showed on March 23. A survey of 1,011 people by Kapa research found that ND’s support fell to 18.1 percent from 21.4 percent in January due to the emergence of the anti-austerity Independent Greeks, led by former ND lawmaker Panos Kammenos, which received 7.2 percent.

Kammenos, who announced the establishment of his party in the town of Distomo, the site of Nazi atrocities during World War II, was expelled from ND for opposing the Papademos government.

The Kapa poll showed that the Socialist Pasok party, led by former Finance Minister Evangelos Venizelos, was second after ND with 14.3 percent. In the 2009 elections, Pasok got 44 percent. Pasok is losing voters to the Democratic Left party headed by Fotis Kouvelis, who polls list as the most popular politician. In addition, a group of Pasok lawmakers split off from the party this month to form a new group.

Samaras, who wants elections to be held once the international financing is assured, has said he aims to win outright and govern without a coalition. Venizelos has said he’s open to cooperating with ND in a new government.

Pasok Poll

Losses for ND and a weak showing for Pasok would leave such a coalition with a slim majority, facing anti-bailout parties on both sides of the house. Most Greeks, or 38.4 percent, see the dilemma in the election as being about whether they accept terms of the bailout accord, according to the Kapa poll. Another 31.7 percent said the main issue is whether Greece will remain a member of the 17-nation euro region.

Of 1,003 people polled by MRB for the Real News newspaper, 76.3 percent wanted to retain the euro as the country’s currency. Of 1,012 people surveyed by Marc for Ethnos newspaper, 75.8 percent said they prefer to stick with the euro.

“Without a regime change in policy implementation and a much broader political consensus in favor of painful, but necessary, reforms, there is a high risk that the program derails,” ECB Executive Board member Joerg Asmussen said in comments prepared for a European Parliament panel in Brussels yesterday. “Political courage is needed more than ever.”

Euro Fate

Pacific Investment Management Co., which runs the world’s biggest bond fund, said it’s “cautious” on euro-area government debt even after the Greek debt restructuring because risks remain that Greece will leave the single-currency area.

“If there is no majority for a continuation of austerity in Greece, the specter of a Greek exit from the euro might well resurface,” Joachim Fels, chief economist at Morgan Stanley, wrote in a note to clients on March 25.

For Greece, “a euro exit will be a national tragedy,” said Vamvakidis of Bank of America. “For the rest of the euro zone, it will be a severe negative shock at least in the short term as the rest of the periphery is still at its early stages of the adjustment process, while the euro zone’s firewall remains underfunded.”

Polls show a growing number of Greeks want to vote now, dashing hopes among European policy makers that Papademos, once vice president of the European Central Bank, will be able to push through the necessary economic reforms. In Italy, Monti, a former European commissioner, was installed in November as head of a non-elected government to implement a fiscal plan for the region’s second-most indebted nation.

“Ideally, Greece would have followed the example of Italy and allow a government of technocrats to implement the program, postponing the elections for at least a year,” Vamvakidis said.

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