The Greek elections were confusing on multiple levels and this may be the catalyst that pushes Greece out of the European Union. Aside from the obvious economic issues, which was my primary focus, the confusion created by the press questioning Greece’s ability to form a new government left me positively dumbfounded. Here in the U.S. it’s a simple matter of counting up the votes and inaugurating the winner. Greece is a parliamentary republic, which means the President is ultimately decided by the 300 member Parliament.
Greece’s top vote getter in the election was Antonis Samaras of the New Democracy Party. However, he won less than 20% of the popular vote and his party only secured a third of the Parliamentary seats. The Parliament holds their Presidential vote after the popular vote determines the Parliament’s makeup. Thus the Presidential vote should be proportional to the Parliament’s popular vote. Typically, Greece’s elections are very similar to ours in that there have only been two parties with any real shot at gaining power. The second leading vote getter, Evangelos Venizelos, of the PASOK party, Greece’s other dominant political party was able to garner 13% of the popular vote and a mere 41 Parliamentary seats.
The inability of either of the primary parties, who both favor austerity measures, to win a majority of Parliamentary seats further muddies the political waters and this is the cause of the, “Greece has failed to form a government” confusion. Greece is now going through the bargaining process with each candidate trying to win enough Parliamentary votes from the other parties to meet the two third’s vote necessary to become President. Currently, neither of the primary parties, New Democracy or Pasok has been able to do it. The anti austerity radical and left wing parties that secured a record proportion of the popular vote have also failed in their turns to corral the necessary votes. This forces a second round of voting, which will require three fifths of the vote to win and will be held next month. Finally, if they are unable to reach a three fifth’s majority, the Parliament is dissolved and a new election is held. The new President will be the one who gets the most votes.
The Greek people appear to be ready to default on their debt. The ability of the radical parties to gain such tremendous support, and possibly the Presidency, is a clear illustration that the Greek people are tired of living under German rule. The austerity cuts that we hear about on TV are very different to the Greek people who have seen their pensions cut in half, government payrolls and compensation slashed as well as nearly 10 tax hikes in the last two years.
The outflow of funds from Greek banks is accelerating at an alarming rate. Businesses and private citizens alike are scrambling to pull every Euro they can get their hands on out of their banks and into another country for safekeeping. Corporate and private deposits have fallen by 20% over the last year and more than 30% since 2009. The inability to form a government over the last week has accelerated the withdrawals to the tune of $700 million in the last week alone. That panic has caused the head of the Greek Central Bank to issue a statement suggesting that there is plenty of liquidity within the banking system and that there is no need to withdraw cash. Obviously, he’s trying to quell the fears of his countrymen by whistling past the cemetery in the dark.
Greece did repay $556 million in foreign notes due to private investors who refused the 53.5% haircut on the brokered swap agreement. However, the situation is unraveling quickly. The rescue fund administrators have already begun withholding funds because the Greek vote drastically reduces their willingness to adhere to current austerity measures. The next line in the sand comes before the end of June when Greece is due nearly 40 billion Euros. The fear is spreading as Spanish yields are now above 6.5%. We stated 6% as their tipping point and now, even the Italian bonds are above that number. Finally, a Greek default will trigger losses around the world and due to the interwoven nature of swaps and derivatives, we don’t really know what that will look like…..no matter what we’re being told.
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