A step toward default?

Photographer: Kostas Tsironis/Bloomberg

Greek Markets Suggest Government May Fall

Mark Gilbert is a Bloomberg View columnist and writes editorials on economics, finance and politics. He was London bureau chief for Bloomberg News and is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”
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Greek lawmakers will vote today on whether to back Prime Minister Antonis Samaras's choice for a new head of state. The collective wisdom of financial markets suggests his gambit may fail, leading to elections early next year that could result in the nation defaulting on its debts.

Samaras needs the assent of 200 out of 300 parliamentarians, though he has three chances to muster that support between now and Dec. 29. Observers reckon he needs more than 170 in the first attempt to be on track for a win; the governing coalition controls 155 of the votes. Failure may usher opposition party Syriza into power on a platform of less economic austerity and a renegotiation of Greece's debts.

Euro in Crisis

The Greek bond market has been in a funk ever since early last week when Samaras announced the vote. With three-year yields above 10-year levels, bondholders are signaling their discomfort about the near-term outlook for the nation's creditworthiness and its willingness to meet its obligations:

The stock market is similarly dismayed at the prospect of a change of government, with Greek stocks underperforming their European counterparts:

The contagion that Greece has sparked in recent years in the bonds of other less-than-healthy euro nations, including Portugal, Spain and Italy, is absent this time. That's because the fixed-income community is convinced the European Central Bank is poised to finally unleash a bond-buying program early next year. The prospect of the central bank vacuuming up government debt to pump deflation-beating cash into the economy makes it hard for bondholders to sell euro debt in advance.

Greek elections would also present the ECB with a dilemma: Does it include Greek debt in its program and risk taking losses in a renegotiation, or does it exclude Greece and risk inflaming fears of a default? Unless Samaras's political gamble comes good, the danger remains that will Greece roil financial markets in January. 

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Mark Gilbert at magilbert@bloomberg.net

To contact the editor on this story:
Mary Duenwald at mduenwald@bloomberg.net