Group Economics
Euro Watch
Macro & Financial Markets Research
Five Big Questions on Greece
Nick Kounis, + 31 20 343 5616
26 January 2015
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Greece is heading for a Syriza-led coalition government following yesterday’s elections
We ask five big questions on the outlook for Greece and its future in the eurozone
Our base case is that Greece will reach a deal with the EU/Troika, but it might be a bumpy ride
1. What will the new government look like?
2. Will Greece remain in the eurozone?
A coalition government is already in place. The left wing Syriza
Yes most likely. Opinion polls report that the vast majority of
party, led by Alexis Tsipras, will form a government with the
Greeks want to stay in the euro. In addition, Greece has made
right wing Independent Greeks party, led by Panos
a lot of progress with reforms, fiscal consolidation and wage
Kammenos. He has already pledged to support a Syriza
adjustment. It would be odd to throw it all away now.
government in a confidence vote in parliament on 5 February.
Meanwhile, other eurozone countries also have an interest in
keeping the club together. There is strong political
The Syriza party came very close to an absolute majority, but
commitment, and the symbolism of a country leaving could be
ultimately was two seats short of the 151 needed in the 300
damaging. Although risks are lower than a few years ago,
seat parliament. The Independent Greeks won 13 seats.
there may still be a significant economic and financial fall-out
from a country leaving. So Greece is likely to stay. However, it
The formation of a coalition government has gone amazingly
depends on Greece reaching a deal with other eurozone
quickly, but it is unclear whether the parties already have the
member states and the Troika.
outlines of any kind of programme. Syriza and Independent
Greeks are from two different ends of the spectrum. As Syriza
Greece’s debt burden is large
economist Yanis Varoufakis – tipped to be finance minister –
Government debt, % GDP
told Bloomberg ‘in terms of social issues, foreign affairs, civil
200
liberties, we are chalk and cheese’.
160
So what do the parties have in common? They are both anti-
120
austerity and pro debt reduction. So these two issues look
80
likely to be at the heart of the agreement.
40
0
Table: Official sector exposure to Greece (EUR bn)
ECB*
EFSF/bilateral loans
IMF
Total
AT
2.0
5.8
0.3
8.0
BE
2.5
7.2
0.6
10.3
GR
IT
PT
IE
2013
BE EZ FR ES AT DE NL
2014
FI
60%
Source: European Commission, ABN AMRO Group Economics
FI
1.2
3.7
0.2
5.1
FR
14.1
42.0
1.5
57.7
DE
17.9
55.3
2.0
75.2
IT
12.2
36.8
1.1
50.2
in the sand relates to Greece getting debt relief. An outright
IE
1.2
0.9
0.2
2.2
debt write off will obviously be politically difficult as it will be
NL
4.0
11.8
0.7
16.5
unpopular in other eurozone states. However, significant debt
PT
1.7
1.4
0.1
3.2
relief could be provided by further lengthening maturities and
ES
8.8
25.0
0.6
34.3
freezing interest payments. Indeed, the Eurogroup already
rest**
Total
1.7
4.8
0.2
6.7
committed to do this once Greece had a primary surplus in a
67.3
194.7
7.6
269.6
Sources: ECB, national central banks, EFSF, IMF, Ministries of Finance,
ABN AMRO Group Economics (due to rounding figures may not add up)
* Contains bonds purchases under the Securities Market Programme as
well as net MRO and LTRO borrowing
** Includes Cyprus, Estonia, Luxembourg, Malta, Slovakia and Slovenia
3. Will the new government be able to reach a deal with
the eurozone?
Yes, but it might be a bumpy ride. On the side of Syriza, its line
statement on Greece in November 2012.
On the side of other eurozone member states and the Troika,
their line in the sand relates to Greece remaining on the path
of reform and maintaining its primary budget in balance or in
surplus. Indeed, debt relief could be made conditional on
2
Five Big Questions on Greece – 26 January 2015
actions by the Greek government. While Syriza is less willing
Greece’s debt mainly to the official sector
than the previous New Democracy – led governing coalition to
Holdings of Greek debt
cut welfare spending, it will be more willing to fight tax evasion
and go after vested interests. In any case, there looks to be
sufficient room for negotiation.
EU/EFSF
In the meantime, there me be a lot of uncertainty and it could
IMF
well be a bumpy ride as both sides play a ‘game of chicken’
ECB/NCB
during the negotiations. Greece’s current bailout extension
Private
ends in February, while the country has significant bond
redemption in July and August.
4. Will there be contagion?
Source: IMF, EU, ABN AMRO Group Economics
No, we do not expect significant contagion during this period of
uncertainty in Greece, as would have been the case in the
past. This reflects that the watershed moment during the euro
European banks’ exposure to Greece
crisis came in July 2012. ECB President Mario Draghi
EUR bn
famously announced that the central bank was willing to do
140
‘whatever it takes’ to save the eurozone. It committed to buy
120
unlimited amounts of the sovereign bonds of trouble states as
100
long as they stuck to EUR-IMF conditionality. This sovereign
80
safety net makes contagion to other peripheral countries less
60
likely.
40
20
0
In addition, the eurozone banking system has less direct
11Q1
exposures to Greece. Exposure to the public sector had
Public sector
already been cut in 2012 because of the restructuring of
outstanding government bonds. However, since then the
12Q1
Banks
13Q1
14Q1
Non-bank private sector
Source: BIS, ABN Amro Group Economics
exposure to the non-financial sector also declined.
5. So a Greek euro exit is no longer a big deal?
We would not go that far. The fall-out looks likely to be less
than in the past, but it could still be very damaging. It could
create worries about the sustainability of the eurozone. The
euro would be seen less as an internal single currency area
and more as a fixed exchange rate regime with high barriers to
exit and entry. In addition, the OMT programme has never
been tested. The truth is we just do not know. We do not have
recent historical experiences of countries leaving a monetary
union. It does not seem like a risk worth taking lightly.
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