Greek Election Gridlock Raises Risk for Bailout, Euro Future

President Elect Francois Hollande
French president elect Francois Hollande, raises his hands in front of supporters after winning the presidential election at Place de la Bastille in Paris. Photographer: Balint Porneczi/Bloomberg

New Democracy leader Antonis Samaras is trying to put together a government after a Greek election that raised fresh questions about the country’s euro membership and triggered the biggest stock-market rout in four years.

Samaras will be given three days from today to put together a coalition from an assembly split down the middle on whether to renege on the terms of bailout agreements negotiated since May 2010. New Democracy and the socialist Pasok party, enemies until the country’s crisis threw them into a national government together this year, are two seats short of the 151 seats needed for a parliamentary majority.

As voters across Europe rebel against austerity measures imposed to stamp out the debt crisis, Citigroup Inc. said today that the risk of Greece leaving the euro by the end of 2013 has risen as high as 75 percent. Yesterday’s election propelled into parliament one party that wants to put land mines on the border with Turkey to stop illegal immigrants and another that wants Germany, the country’s biggest donor, to pay World War II reparations. The benchmark ASE Stock index plunged 6.3 percent at 1:01 p.m. in Athens.

‘Leave the Euro’

“The risk is huge that Greece will not have in the near future a government ready and able to fully continue the current adjustment program,” Holger Schmieding, chief economist at Berenberg Bank in London, said in an e-mailed note. “The Greek result adds to the risk that Europe could turn off the flow of support funds and thus force Greece to leave the euro.”

Samaras may focus his advances on the Democratic Left, which won 19 seats in the parliament and rejects austerity measures yet is in favour of remaining in the euro. For now Democratic Left has indicated it doesn’t want to join a government with New Democracy and Pasok.

Should Samaras fail to get the necessary number of seats, the onus on forming a government will fall to bailout opponent Syriza, which came second in the election with 52 seats. After that, Pasok, which won 41 seats, gets a go. If the nine-day process fails to yield a coalition, President Karolos Papoulias may then try to broker a government of national unity. Should that process fail, new elections may be a possibility.

Even if a new government is formed, it may not survive for long, said Spyros Economides, a senior lecturer at the London School of Economics.

“How long will they be able to cohabit?” Economides said in a phone interview. “The question is, if you’re a supporter of the pro-European line, can you get the sticky-tape out and hold them together for 6 months or are you going to have a second election before the summer?”

Left Party Surges

Syriza, a coalition of left parties, has vowed to cancel the bailout terms.

“I asked for a strong mandate,” Samaras said in Athens yesterday. “The people decided otherwise.”

As leader of the biggest party, Samaras is due to receive a three-day mandate today to try and form a government. He meets the president at 3 p.m. local time. He’s due to meet the leaders of Pasok and Syriza later in the day.

Euro Falls

Greece’s ASE Stock Index dropped as much as 8.3 percent to 632.77 points, close to the 20-year low of 626 hit in January. Shares of EFG Eurobank SA and Alpha Bank SA fell more than 18 percent. National Bank of Greece SA, the nation’s largest lender, dropped more than 14 percent. The euro also fell as French socialist Francois Hollande defeated Nicolas Sarkozy in the country’s presidential election yesterday. The single currency dropped 0.4 percent to $1.3027.

With anti-bailout rhetoric benefiting parties as diverse as Golden Dawn, which wants land mines along Greece’s borders to halt immigrants, and Independent Greeks, which wants Germany to pay compensation for World War II war crimes, Pasok and New Democracy’s coalition partners are limited. Democratic Left might be convinced to join because of its more clearly European orientation, said Lefteris Farmakis, a strategist at Nomura International Plc in London.

“It’s the only realistic coalition partner,” he said.

The Communist Party won 8.5 percent, according to the latest projections, and will get 26 seats. Anti-immigrant Golden Dawn got 7 percent of the vote with 21 seats, entering Parliament for the first time.

Anti-Bailout Success

The success of anti-bailout parties in the Greek election may spark speculation about the country’s ability to push through the cuts needed to ensure funds keep flowing from Europe. At the same time, European taxpayers now hold the bulk of the country’s debt, meaning governments may have little option but to keep the country’s finances afloat.

Of Greece’s 266 billion euros ($347 billion) of debt, about 194 billion euros -- or 73 percent -- is held by the European Central Bank, euro-area governments and the International Monetary Fund, according to the Greek Debt Management Office in Athens. In 2010, before the first bailout, Greece owed about 310 billion euros, all to the private sector.

Austrian Chancellor Werner Faymann became the first major European leader today to reopen the debate about Greece’s membership of the euro, a tactic that the head of Syriza dismissed as blackmail during the election campaign.

Free to Quit Euro

“Every country can decide to leave the common euro area, of course Greece can as well,” Faymann told Austrian state radio ORF. “You just have to know what it means -- and the Greeks will have to consider that.”

Alexis Tsipras, the head of Syriza, said voters had given him a mandate to renege on bailout agreements negotiated with the EU and the International Monetary Fund.

“The people of Europe can no longer be reconciled with the bailouts of barbarism,” Tsipras, 37, said on state-run NET TV late yesterday. He said he would begin talks with parties of the Greek left to achieve that goal. The head of the Communist Party, Aleka Papariga, said she won’t team up with Syriza.

New Democracy and Pasok, which have alternated in power since 1974, were partners in the outgoing caretaker government of Prime Minister Lucas Papademos, which secured a second rescue package earlier this year, saving Greece from financial collapse.

Under the terms of that 130 billion-euro package, which was accompanied by the biggest debt restructuring ever, international lenders expect to hear in June how Greece will achieve 11.6 billion euros of savings for 2013 and 2014.

The Greek election result came amid unemployment of almost 22 percent and a jobless rate of almost 51 percent for those under the age of 24.

Voter turnout was 65 percent, the Interior Ministry said on its website.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE