Mind the GAP

Greek Elections: Update

The decision of Georgios Andreas Papandreou, former Prime Minister of Greece, to launch his own party ahead of the forthcoming Greek general election has added another dimension to what is an already complex situation. Papandreou’s new party, the Movement of Democratic Socialists, looks like it could well achieve the necessary 3% of the vote to gain representation in parliament; in the most recent polls (for Mega TV, To Pontiki, and the poll by Pulse) – all conducted within days of the announcement of the formation of his new party – the Movement of Democratic Socialists looks to have taken 2.5% to 2.7% of the vote. Not bad from a standing start. If Papandreou builds further from here, he could well play a role in any coalition government. Interestingly, Papandreou’s gains appear to have come, firstly and primarily from those voters that had previously classed themselves as ‘undecided’, and secondly from PASOK, his former party (founded, in fact, by his father). The traction with voters who had previously been in the undecided camp suggests that Papandreou may be perceived as a palatable alternative by those who wish to signal dismay with the incumbent government, but who are too worried to vote for Syriza.

So what do we know of Papandreou’s stance on the real issue on which the upcoming election will be fought – namely the tension between widespread anger at the austerity measures and the desire to remain within the Eurozone? Firstly, it is surely significant that Papandreou as then Prime Minster of Greece actually enacted the first austerity programme immediately after assuming office in 2009. Furthermore, in April 2010, he asked for the bailout by the EU and the IMF; and herein lies the origin of the further rounds of austerity measures enacted at the behest of the so-called Troika of Greece’s creditors. Thus, to an outsider, it might seem somewhat extraordinary that the man who was so closely associated with the deeply unpopular austerity programmes – the widespread anger against which, to date, has served Syriza so well in the polls – could be expected to garner any significant share of the vote. The fact that he may well achieve representation in the coming election must owe much to the Papandreou name, with this family producing three Prime Ministers of Greece, each of which has been of a centrist or leftist persuasion (in a country which laboured under a right-wing military dictatorship between 1967-74).

As far as his policies are concerned, little, thus far, is known, with vague comments being made about ‘getting back to grassroots’. We might surmise that Papandreou will try to tap into public anger at the austerity measures, whilst articulating a commitment to stay in the Euro. As such, his strategy can be said to be similar to that espoused by both Potami and PASOK; these parties are both committed to staying within the Euro, but neither have categorically ruled out the idea of working in coalition with Syriza. We would assume that Papandreou would also choose to work with Syriza in a coalition – if he achieves representation and assuming he is asked to do so. On this latter point, one could make the argument both ways: on the one hand, Tsipras may not wish to have such a powerful figure in a coalition government – he could well envisage the likelihood of Papandreou becoming a thorn in his side at some point down the line; on the other hand, Papandreou’s presence may lend an aura of legitimacy to a Syriza-led government, such is the magic of a name.

In the final analysis, the fact that Papandreou seems to be garnering the major proportion of his support from voters that had previously classed themselves as ‘undecided’ is, I think, the most significant aspect of this latest development. If this trend continues, the probability of Syriza winning an outright majority should be significantly reduced since this category of voters was sizeable (at around 13% prior to recent polls) and hence added a great deal of uncertainty to forecasting. From a market perspective, this is an absolute positive as it would remove the worst case scenario from the equation. We must, however, keep a close eye on the situation. If Papandreou were to begin to significantly eat into the New Democracy vote – effectively widening Syriza’s lead – then this would be perceived as negative. Another possible negative to consider would be a coalition comprising just Syriza and the Movement of Democratic Socialists: Papandreou’s putative attempt in 2011 to launch a referendum on acceptance of the terms of the bailout deal cannot but be worrying in the current climate since the call for such a referendum is a likely riposte by Tsipras if and when stalemate has been reached in negotiations with the Troika. Thus a coalition formed of just Syriza and Papandreou’s party might be viewed as more likely to succeed in launching such a referendum, whereas the presence of another party (or parties) would most likely result in the coalition falling apart, triggering further elections (and avoiding the tail end risk of the Greeks deciding the terms of continued Euro membership are too onerous). This scenario is merely hypothetical at present, and Papandreou would have to at least double his share of the vote before such a two-way coalition should be entertained as a real possibility (based on the size of the expected vote for Syriza).

To conclude. In spite of the fact that Syriza’s lead over New Democracy was shown to have marginally narrowed in the latest polls, the probability remains that Syriza will take first place on January 25th but will lack sufficient votes to get an outright majority and will consequently seek to form a coalition with the smaller parties. My analysis of events subsequent to the forming of a coalition government (comprising at least three parties) has not been altered by this latest development: expect a Tsipras showdown with the Troika, a subsequent impasse, and the collapse of any coalition amidst Syriza calls for a referendum on continued membership of the Eurozone on the current terms (see my previous article, Grexit or Grin, for more detail).

At this juncture I should also highlight that I do not read the comments reported to have been made by the leader of Potami, Stavros Theodorakis, on January 9th as definitively ruling out the possibility of working with Syriza in coalition; the comment about his party not allowing ‘any gamble with Greece’s membership in the euro area’ (which triggered a c.+2% rally in the Athens market) has been taken, in some quarters at least, to signify a refusal to work with Syriza. However, I see this as part and parcel of the usual political horse-trading: Potami may well prove to be the king-maker, but will seek to extract promises with regard to its own political agenda from the senior coalition partner.

The possibility of a relief rally that I highlighted as a scenario in my previous article – i.e. the market actually rallies on a Syriza win where the scale of the win is such that Syriza needs to enter into coalition in order to form a government – remains; Papandreou’s previous dealings with the Troika as Prime Minister may be cited as evidence of his being a ‘safe pair of hands’ that could help tone down the more extreme of Tsipras’ demands. However, as articulated above, were a coalition government to comprise Syriza and the Movement of Democratic Socialists alone, then there may ultimately be a greater probability of a referendum taking place after Tsipras’ demands are rejected by the Troika (whereas the presence of another party in the coalition would tend to act as a safety valve – the coalition falling apart rather than agreeing to a referendum). Consequently, under this scenario, one might expect greater market volatility.

Our theoretical trading strategy thus remains unchanged: in all cases where a coalition is involved, any relief rally could be played from the long perspective, but long positions should be closed and short positions initiated as negotiations with the Troika commence; Tsipras has little room for manoeuvre in his own party and is likely to take it to the wire. As before, if the market initially falls rather than rallies on a coalition announcement, shorts should be immediately instigated.

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