Financial Times:Snap election in Greece reignites fears for eurozone

Elaine Moore and Robin Wigglesworth in London, Kerin Hope in Athens and Peter Spiegel in Brussels

Greece’s political woes re-erupted as a threat to global financial stability yesterday, triggering the biggest drop on the Athens stock exchange since the 1980s and sending reverberations through world markets.

Concerns about Greece fed into a broader fall in global stock markets, already spooked by sliding oil prices and a sharp drop in Chinese equities. The S&P 500 fell 1 per cent shortly after opening while the EuroStoxx index of eurozone companies fell for the second day, down 2.5 per cent.

The trigger for the plunge was prime minister Antonis Samaras’ announcement of a snap presidential election. If he fails to win sufficient support for his candidate, an early general election could follow which investors fear will bring to power the radical left Syriza party.

Such an outcome would reignite fears about Greece’s place within Europe’s monetary union. Syriza wants to renegotiate the country’s sovereign debt and hike public spending, moves which would put Athens at loggerheads with its creditors.

“Greece in the next 6 weeks may prove to be more important for global markets than Russia/Ukraine was in 2014,” said Charles Robertson, chief economist at Renaissance Capital. “A possible Syriza election victory may force the eurozone to choose between a fiscal union (debt write off for Greece) or the first Euro exit.”

The Athens exchange closed 12.8 per cent lower on Tuesday, the biggest one day fall since December 1987. Greek banks led the market decline, with shares in Attica Bank losing more than 26 per cent and Piraeus Bank 17 per cent.
Anxiety about political turmoil also led investors to price in a greater chance of Greece defaulting on its debt, pushing short term government borrowing costs above long term rates.
In a brief television appearance, Mr Samaras said he decided to bring forward the presidential contest — a vote by members of parliament — to restore political stability following pressure on the government to hold an early general election.
“The presidential vote had become an excuse for blackmail over early elections,” he said, referring to Syriza’s recent demands for an immediate vote.
“Even though we have stabilised the economy and have finally returned to growth, clouds have gathered in Greece over political stability and there is uncertainty abroad about Greece’s prospects,” he said.
Mr Samaras had originally promised to end Greece’s punishing four-year bailout era this month, but failed to undertake the reforms necessary to secure the concluding bailout payment.

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Syriza came first in European parliamentary elections in May, buoyed by public anger at the painful austerity measures required under the €245bn international rescue. Opinion polls suggest it would also win a general election, which would turn a fraught relationship between Athens and its international creditors into a full-blown crisis.
A leaked memo by an analyst at Capital Group present during Syriza’s meetings with investors in London last month described the party’s plans for the country as “worse than communism”, saying those at the meeting wanted to “sell everything in Greece”. Syriza has denied that the analyst was present at the meetings.
By bringing forward the first round of the presidential election to December 17 — with further votes on December 23 and 29 — Mr Samaras appears to be gambling that independent MPs and those from smaller parties will back his candidate rather than face political and financial chaos triggered by a Syriza victory. He needs 180 votes, but the governing coalition only has 155.

Q&A

What is behind Greece’s snap presidential election?

Why did Greek prime minister Antonis Samaras call a snap presidential election? The government wants to put an end to weeks of political uncertainty, which has sent spreads on Greek bonds soaring, blocking Athens from borrowing on international markets and damaging confidence in a Greek economic recovery.

Mr Samaras also hopes to use a two-month extension to the bailout agreed on Monday night to his advantage — to convince wavering MPs that he can secure the best deal for Greece as it exits its rescue programme.
The country’s heavy debt burden and political unrest has cemented its status among investors as one of the eurozone’s weakest economies, despite a rebound in growth this year.
Greece’s borrowing costs are the highest in Europe and according to the International Monetary Fund, government debt will peak at 174 per cent of its national output this year — a record debt to GDP ratio for the eurozone.
During the October “flash crash” in bond markets, the country’s benchmark borrowing costs rose above 9 per cent — a level regarded as unaffordable for Greece by many European debt investors. On Tuesday, yields on Greek bonds maturing in three years time rose above 8 per cent, 25 basis points higher than equivalent 10 year yields, an indication that investors were growing increasingly concerned about the country’s ability to service its debts in the near future.

Pierre Moscovici, the EU’s economic chief, said he had spoken with Mr Samaras about his decision to call a snap election and expressed confidence the government would be able to manage the process.
“The markets are always very sensitive to political uncertainty,” Mr Moscovici said after a meeting of EU finance ministers in Brussels. “I believe if prime minister Samaras chose this way it’s because he’s confident in his capacity to have a successful election.”
“I feel the markets should feel more secure than they showed this morning,” Mr Moscovici added. 

Source: FT