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Citi: No viable government in Greece to fulfill programme requirements

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The Greek parliamentary elections delivered a fragmented result that highlighted growing public opposition to austerity, foreshadowing significant challenges ahead at forging the political consensus necessary to keep the country in the euro, according to a report published by Citi on May 7th.

Even considering the push for a growth agenda among European leaders, including newly elected French President Francois Hollande, Citi sees significant potential for a new Greek government to miss the next round of targets and a rising risk of a Greek exit (“Grexit”) from the euro within the next 12 to 18 months, and increase our probability of this occurring from 50% to between 50-75%.

Greece’s first parliamentary election since the crisis brought a sharp fall in public support for the mainstream parties that have dominated politics in recent decades and a shift to the extreme left- and right-wing parties, many of which are against the Troika programme, though no end of EU or euro area membership.

According to the report, seven parties exceeded the 3% threshold of votes instead of the up to 10 suggested in earlier polls. This result nevertheless leads to a highly fragmented parliament and underscores rising public opposition against austerity. Based on the data covering 89% of the electorate, with the bonus of 50 seats in Parliament for the party with the highest share of votes (19.3%), the New Democracy Party (ND) led by Antonis Samaras receives 109 seats in Parliament, while the PASOK Party of former Finance Minister Evangelos Venizelos, is only the third largest party and gets 41 seats. With SYRIZA (coalition of the radical left) being the second strongest party (16.5% of votes) and the Communist Party (KKE) being the fifth largest party (8.4%), the extreme left parties received around a quarter of votes.

At the same time, the nationalist Golden Dawn Party came in as the sixth largest party with 6.9% of votes. The right-wing Greek Independent Party was the fourth largest party with 10.5% of votes and is very unlikely to support the government in the implementation of the required austerity measures. The Democratic Left Party (DIMAR) received 6.1% of votes.

In a statement last night, ND leader Mr. Samaras – who was earlier against building any kind of coalition government – said that he would seek to form a “national salvation government” to keep the country in the eurozone and pledged to “amend” Greece’s debt deal with foreign creditors in a bid to boost growth.  PASOK leader Mr. Venizelos also talked about the possibility of forming a national unity government with a “European orientation”. However, among the parties that entered Parliament only the DIMAR party – which is against the current Memorandum of Understanding (MoU), but in-principle supports the deal if it comes with different details – might be willing be part of such a government coalition. If no agreement on a government coalition can be reached, another round of elections is likely. The earliest possible date for a second round of elections would be June 10. Without a functioning government, it seems highly unlikely that Greece would be in a position to present the Troika with plans for additional budget savings worth 7% of GDP by the end of June.

Citi notes that while there might be room to change some details of the MoU, to us, it looks very unlikely that the new Greek government will be able to obtain larger changes of the programme details with the Troika, even with the influence of Mr. Hollande on the European side.

Overall, the outcome of the Greek election shows that it will be very difficult to form a viable coalition and to implement the measures required in the MoU. Particularly, the identification of the 7% GDP of budget savings for 2013 and 2014 by the end of June looks very unlikely to us. As a consequence, in a first step, the Troika is likely to delay the disbursement of the next tranche of the programme.

Note that for 2Q 2012, disbursements of €31.3bn from the bailout programme are scheduled. If Greece does not make progress, in a second step, the Troika is likely to stop the programme, Citi reports.  If that happens, the Greek sovereign and its banking sector would run out of funding. As a consequence, we expect that Greece would be forced to leave the euro area. With the outcome of the election, to us the probability of a Greek exit is now larger than our previous estimate of 50%, and rises to between 50-75%.

However, even after the elections in Greece, France and Germany, we regard the probability of a broad-based break up of the monetary union as very low. "We continue to expect that in reaction to Greece leaving the euro area, more farreaching measures from governments and the ECB would be put in place" said CIti.
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