Greece Votes on Sunday – Then What?

Sunday’s upcoming second election in Greece is too difficult to call. Preparations for a worst-case scenario “Grexit” won’t be needed on Monday, ho...
Andrew SawersJune 13, 2012

Reuters reported on Monday that European officials have been discussing the possibility of imposing capital controls as part of “worst-case scenario plans” in the event that Greece leaves the euro. Border controls and limits on ATM withdrawals are also said to feature in their thinking. It’s raised speculation that Greece’s possible departure from the euro could be more likely and more imminent than had been thought likely up until now.

It also hints at a much messier breakup than the “orderly exit” European officials and politicians like to believe in. So, too, does the recent news that Dixons, a British retailer that has stores in Greece under the Kotsovolos brand, has been preparing for possible postexit rioting by ordering security shutters for its outlets.

With elections taking place again on Sunday, June 17, politicians’ and investors’ nerves are frayed. The outcome is far from certain, not least because Greek law forbids publication of opinion polls in the two-week run-up to the election. There has been some suggestion that the recent €100 billion bailout of the Spanish banking system, widely regarded as having few strings attached as far as the government’s fiscal measures are concerned, may spark an envious and angry antiausterity backlash in Greece.

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Greece is highly unlikely to revert to the drachma on Monday, June 18, however. “That’s not the story,” said Laurence Boone, Europe economist with Bank of America Merrill Lynch (BAML) in a press briefing on Tuesday. “There is no large [political] party which wants to leave the euro zone. They all want to negotiate.” She said the worst-case scenario is that the result again fails to produce a government and fresh elections are held for a third time a month later.

CFO European Briefing suggested that Greece may not want to leave the euro but it wasn’t obvious they were prepared to pay the price of staying in. Boone replied that it was important to remember that Greece has been stuck in election mode for more than a month.

Moreover, she said, the primary budget deficit in Greece has actually fallen to about 1%. “They have done some things,” she said. In the negotiations that will take place with European authorities after the election, “I don’t think they will get away with less reforms,” she said, “ but they might be able to get a bit more time.”

A research note issued by the BAML after the first, inconclusive elections in May said that the risk of a Greek exit was rising: “The current situation could trigger a chain of events that could lead Greece to exit on its own.” But the BAML continues to believe the country will stay inside the euro.

Its note added that the incentives to keep Greece in were also rising. IMF data suggests the Greek GDP could fall by as much as 10% in year one after a “Grexit,” which could also spill over into other countries, “resulting in deposit flights threatening the stability of banking sectors and destabilising sovereign bond markets.” The BAML believes, therefore, that “a forceful set of [European] policy measures would be implemented” to keep Greece in.

Andrew Sawers is editor of CFO European Briefing, a CFO online publication.