Alexis Tsipras ready to test Eurozone’s political sturdiness; Up to what point?

SYRIZA leader Alexis Tsipras talking to members of the Press. (European Parliament Audiovisual Services).

With the left-wing SYRIZA ready to form a new government in Athens, the party will be the first radical political formation to lead a Eurozone country, and its leader Alexis Tsipras will be the youngest Greek prime minister for more than one and a half century. The party won yesterday’s legislative election with an 8% lead and 149 deputies in a house of 300, ahead of the incumbent New Democracy center-right party getting 76 seats.

SYRIZA fought the brief electoral campaign under its characteristically radical anti-austerity populist banner, promising though not to jeopardize the country’s position in Eurozone, by employing a misty rhetoric about what the party is ready to do to safeguard it. In a peculiar combination three-quarters of the population want the country to stay firm in the euro area, but at the same time they do not accept the needed policies to serve this option.

Wrong policies?

Greece has been applying a highly unpopular severe austerity and reform program for the past five years, as foreseen in two consecutive Memoranda of Understanding, signed between the country and its creditors. In retrospect, those two MoUs have been heavily criticized for callousness and grave errors by a lot of authoritative economic institutions and analysts, even by one of its authors the International Monetary Fund.

In April 2010 Greece was the first Eurozone member state threatened by immediate bankruptcy amidst the economic crisis and the country’s long time careless financial management. Then a hastily formed Troika of auditors/creditors comprising the European Commission, the European Central Bank and the International Monetary Fund undertook to financially support  the country, in exchange of a severe austerity program. It was targeted at drastically reducing a 15.6% of GDP fiscal deficit and an equally devastating foreign account gap.

A debilitating debt

A second similar program was agreed in 2012, accompanied by a Eurozone promise (which is still not honored) for partial debt forgiveness, if Greece attained a fiscal surplus. All along those years the country’s creditors, the Troika, covered the budget deficits and footed the maturing debt bills, in exchange to tough reforms and ultra-severe austerity measures.

Now it is questionable if all that was needed to bring Greece back to its feet. The debt was given a hair cut touching only its private segment thus destroying the Greek banks and pension funds. The Troika jealously safeguarded the German and the French mega-banks from any kind of co-responsibility for imprudent lending, and consequently their survival was charged to the Greek, not German or French, taxpayers. As a result, at the end of last year the Greek government debt topped at the exorbitant amount of €360 billion or 170% of GDP.

Who pays the cost?

In any case the current, second Memorandum of Understanding was supposed to expire at the end of 2014, the year that Greece really attained a fiscal surplus. However, in view of the political developments and the proclamation of yesterday’s election the second MoU program was ‘technically’ extended by the Troika for two months until the 28 February. It is also apparent that Berlin and Brussels have forgotten the promise for an alleviation of the debt.

Against all odds though it turned out that after five years of killing taxation and government spending cuts, Greece managed to produce in 2014 a primary (excluding interest payments) fiscal surplus in the government budget and a balanced foreign account. Nevertheless, the cost for the two major political parties which led Greece to those attainments was high. The once mighty socialist PASOK party, which was omnipresent in Greek politics continuously from 1974 till 2012 yesterday got a mere 4.7% of the vote and 13 deputies. The incumbent Prime Minister Antonis Samaras’ party New Democracy got yesterday 28% of the vote and 76 seats in the Parliament, finishing second in the race.

The turn of SYRIZA

SYRIZA is clearly a product of anger. It started as a marginal extreme left wing party of 3% only a few years ago, to skillfully manage within three years to authentically express the public outrage. It gradually watered down its extreme left-wing positions, in order to reach the impoverished middle class voters. All that happened in an environment of economic destruction. Unemployment is ravaging Greece. More than 26% of its working age citizens are without a job, while the average family has lost one quarter of its income since 2008. Almost 40% of the population is in the state of poverty or threatened by it, according to Eurostat the EU statistical service. Youth unemployment reached 60%.

Widespread bitterness has more byproducts though. The Golden Down (a racist group with its leadership currently in jail accused of forming a criminal gang) came yesterday in the third place and is expected to elect 17 deputies. A recently created reformist party ‘The River’ is in the fourth position and about to elect 17 MPs. The traditional Communist Party is in the fifth place but its leadership has firmly rejected any idea of cooperating with SYRIZA. PASOK is sixth and the nationalist right-wing party ‘Independent Greeks’ (Anexartitoi Ellines) seventh.

This last political formation, an unruly offspring of New Democracy, is very close to SYRIZA’s anti-Memorandum and anti-austerity populist rhetoric. Quite openly both of them have not excluded cooperation in a government scheme. Given that SYRIZA won’t find difficulties in forming an administration with solid Parliamentary backing. Already representatives of the two parties have set a meeting for today.

Face the creditors

However, the easiness with which SYRIZA managed to ascend to the top of Greece’s political horizon seems to have ended yesterday. As of today Alexis Tsipras has to convince Greece’s creditors in Germany, Brussels and the other major euro area capitals, even the IMF in Washington, about a lot of things. To begin with, he needs more time than the 28 February to formulate a negotiable proposal about how can Greece continue being financially supported by Eurozone but at the same time easing off austerity.

Nobody in Brussels and Berlin believes that an agreement can be reached before the end of next month that is until the ‘technical’ extension of the current Memorandum expires. Unfortunately, the ECB has stated that if Greece is not under ‘a program’ the central bank cannot continue covering the liquidity of the Greek banks. Related problems may arise if more depositors choose to withdraw their money.

Crucial four weeks

For another ‘technical’ extension to be granted to Greece though the government has to at least file an application. In view of that, many SYRIZA dignitaries have stated that the party is rejecting in its entirety the present arrangements with the Troika, and consequently is not going to ask for any extensions or revisions of the present status. Even if this stalemate is resolved during the next few weeks more like it will appear soon.

The difficult exercise remains that SYRIZA demands a lot and gives almost nothing. They ask for massive debt alleviation, a free hand over internal economic policies and of course the continuation of Eurozone financing in order to pay maturing bonds. More than €7bn during the next six months is needed to meet those needs.

In short, there are two critical issues for the new government and its creditors. The first is what will happen during the next four weeks around the application for the ‘technical’ extension of the current Memorandum. Then during the next few months and up to the end of June, the two sides must have clarified their relation in every detail. The reason is that Greece will need €7bn to repay its debt paper maturing in July and August. And that if Athens wants to stay afloat and in Eurozone. But what will the other side accept in return?