Samaras Warns of Euro Exit Risk as Greek Campaign Starts

Greece's Prime Minister Antonis Samaras
Antonis Samaras, Greece's Prime Minister, said the country would be driven into default and out of the European single currency by the policies of Syriza, which has vowed to increase wages, expand the number of government jobs and persuade the euro area to write off some Greek debt. Photographer: Kostas Tsironis/Bloomberg

Greece’s political parties embarked on a flash campaign for elections in less than three weeks that Prime Minister Antonis Samaras said will determine the fate of the country’s membership in the euro currency area.

Samaras used a Jan. 2 speech to warn that victory for the main opposition Syriza party would cause default and Greece’s exit from the 19-member euro region, while Syriza leader Alexis Tsipras said his party would end German-led austerity. Der Spiegel magazine reported Chancellor Angela Merkel is ready to accept a Greek exit, a development Berlin sees as inevitable and manageable if Syriza wins, as polls suggest.

The high-stakes run-up to the Jan. 25 vote returns Greece to the center of European policy makers’ attention as they strive to fend off a return of the debt crisis that wracked the region from late 2009, forcing international financial support for five EU countries. While Greek 10-year bond yields rose 16 basis points to 9.41 percent today from a post-crisis low of 5.57 percent in September, the relative improvement in yields from Italy to Ireland suggests that the contagion has been contained. The benchmark ASE stock index fell 2.4 percent to 816.46 at 11:42 a.m. in Athens.

“Many European officials believe a Greek exit would be manageable, and in contrast to 2010-2011, we wouldn’t see the same cascading effect on countries like Spain or Ireland,” Fredrik Erixon, director of the European Centre for International Political Economy in Brussels, said by telephone.

‘Unreasonable, Catastrophic’

The euro declined 0.5 percent to $1.1938 at 10:25 a.m. in London, after touching its lowest level since March 2006.

Tsipras, in a speech on Jan. 3, vowed to restructure his nation’s debt and end what he called the “unreasonable and catastrophic” austerity policies.

Greece will “write down on most of the nominal value of debt, so that it becomes sustainable,” Tsipras said, according to the e-mailed transcript of a speech in Athens. “That’s what was done for Germany in 1953, it should be done for Greece in 2015.”

Erixon said it’s realistic to see greater flexibility in Germany and other euro members regarding Greece as they now have more leeway given that the crisis has cooled.

“The great unknown is Tsipras because he’d be elected on a radical platform and if he can’t deliver his government won’t last long,” Erixon said.

Merkel Flexibility

A report by Carsten Nickel and Wolfango Piccoli of Teneo Intelligence found Germany is likely to adopt “a more flexible manner” in dealing with the new Greek government.

“Keeping all options on the table is a trademark of Merkel’s approach to policy-making,” the report found.

Norbert Barthle, the senior budget lawmaker in Merkel’s Christian Democratic alliance, said the euro bloc is in a different situation than in 2010 because it now has a firewall.

“It’s in our own interest to keep Greece in the euro area,” Barthle said by phone. “But if Mr. Tsipras wins and keeps his promises -- ditching the troika and breaking rescue promises -- then I see problems. The state will go bankrupt.”

Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, said “it’s regrettable that, as was the case in 2011 and 2012, there’s a lot of loose talk about Greece.”

Market Reaction

“The problem is less about Mr. Tsipras and more about markets’ reaction to a possible Syriza-led government,” Spiro said in an e-mail. “If one thing has been made patently clear over the last four years, it’s that investors have struggled to price Greek risk accurately.”

Merkel’s administration sees a potential Greek exit from the euro area as manageable, Der Spiegel reported, citing unidentified government officials in Berlin.

Merkel and Finance Minister Wolfgang Schaeuble both view the shared-currency area as capable of withstanding Greece’s departure, a scenario that would become almost unavoidable if a new government led by Tsipras were to renege on spending cuts and fail to service the country’s debt, according to the Hamburg-based magazine.

German Finance Ministry spokesman Martin Jaeger said by phone that he wouldn’t comment on “speculative scenarios.” The ministry referred to a Dec. 29 statement by Schaeuble, who said there was no alternative to Greek efforts to overhaul the economy, which are “bearing fruit.”

‘Different Path’

While Germany will continue to support the Mediterranean country, “if Greece chooses a different path, it will become difficult,” Schaeuble said in the statement. The new government must stand by agreements made by its predecessors, he said.

Accepting Greece’s exit from the euro area would mark a reversal of Merkel’s position throughout the currency bloc’s debt crisis, which erupted in Greece in 2009.

A Greek exit would mean “very high risk” for the stability of the currency union, the Welt am Sonntag cited Peter Bofinger, an independent economic adviser to Merkel, as saying in an interview yesterday. “Even if the situation cannot be compared with the other euro members, a genie would be let out of the bottle that would be hard to control.”

Contagion Diminished

The threat of contagion has since diminished, Spiegel cited the government officials as saying. They pointed to the recovery in Ireland and Portugal, two euro nations that sought bailout assistance, as well as the strength of the currency area’s backstop fund and the establishment of a bloc-wide banking union, the magazine reported.

Greece is holding early elections after Samaras, whose New Democracy party has led a government since mid-2012, failed to get parliamentary backing for a new head of state. Polls show New Democracy and Pasok, Greece’s two main parties over the past four decades, trailing Tsipras’s anti-austerity Syriza alliance.

Samaras, 63, said Greece would be driven into default and out of the European single currency by the policies of Syriza, which has vowed to increase wages, expand the number of government jobs and persuade the euro area to write off some Greek debt.

“What Syriza says would lead to bankruptcy,” he said Jan. 3 in a speech in the central city of Larissa. “What they say can’t be done and would drive the country into a huge adventure.”

Wild Card

A wild card in the election is former Greek Prime Minister George Papandreou who on Jan. 3 announced the formation of a political party called the Democratic Socialists. Papandreou, a former leader of the Pasok party founded by his father Andreas, was prime minister from Oct. 2009 to Nov. 2011.

No polls have been conducted since Papandreou set up his new political movement. Syriza’s lead narrowed slightly with the party getting 30.4 percent versus 27.3 percent for governing New Democracy, according to a Rass voting intentions survey published yesterday in Eleftheros Typos newspaper.

While the poll took place before Papandreou founded his party, 6.1 percent of those surveyed said they could vote for a Papandreou party.

Greece’s European partners have lent the country money with interest rates that are lower than the ones they are paying themselves, Samaras said.

Greek Interest

Greece currently pays an average of 2.4 percent interest on its sovereign debt, less than the 2.7 percent average rate Germany pays for its bonds, Frankfurter Allgemeine Zeitung reported Jan. 3, citing reports by the European Union, the European Central Bank and the International Monetary Fund.

“Tsipras should be careful what he wishes for,” Erixon said in an e-mailed reply to questions. “Greece could wrestle debt reductions out of Germany’s hands, but only as part of a larger package with continued fiscal control of Greece.”

“That’s the quid pro quo: Tsipras can get one of his aims achieved, but only by reneging on his electoral promise of re-gained economic and fiscal sovereignty,” Erixon said.

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