Aug 27th 2015, Greece faces bottleneck in the selection of caretaker prime minister, amid deterioration of economy

Athens, Aug 27th

 

Greece, political developments. Greece is heading to snap elections amid disagreements as regards who will be the caretaker prime minister

• Greece’s prime minister Tsipras, confirmed during his first pre-election interview that he won’t be prime minister of a coalition government which will include other pro-European political parties i.e. New Democracy (centre right), PASOK (centre left) and Potami (centre).
• he also reconfirmed his willingness to form a coalition government of   SYRIZA (left) and Independent Greeks (nationalists).
• however, two polls published this week show that

a) SYRIZA’s rupture reduce the chances that SYRIZA will get the majority of MPs after the forthcoming elections

b) we may see the unthinkable until couple of weeks ago i.e. SYRIZA won’t be the first political party in terms of number of votes (this is a prerequisite in order to get 50 additional MPs which are given to the first political party which comes first in terms of votes)

c) it is highly likely that Independent Greeks won’t surpass the 3% threshold and won’t participate in the next parliament.

• according to Greece’s Constitution, today is the last day of exploratory mandates. The leader of the newly formed Eurosceptic party LAE, Lafazanis currently holds the exploratory mandate but has no chances to form government.  
• according to Greece’s Constitution unless there is an agreement by the leaders of political parties, the President of Greek Democracy, Pavlopoulos has to choose as caretaker prime minister, one of the Heads of the three Supreme Courts.

However, it seems that there is a disagreement as regards the selection of Thanou as caretaker prime minister. Thanou is currently the Head of one of the three Supreme Courts but the other two positions of Heads of Supreme Courts are still vacant.

As a result, Mr Athanassiou the former Minister of Justice of New Democracy’s government raised compliance issues related to Thanou's candidacy because: a) her appointment to the post of Head of Greece's Supreme Court occurred couple weeks ago b) she was selected by the government for the post of the Head of the Supreme Court while there were more senior judges than her c) Tsipras Government didn’t select Heads for the other two Supreme Courts.

So far, there is no backing of Athanassiou’s allegations by his party (New Democracy) but the issue remains.

Risk assessment: Greece’s political system is going through a tough and complicated restructuring of its political system. The caretaker government will organise snap elections amid a) budget derailment, b) significant deadlines as regards 3rd memorandum (i.e. recapitalisation of Greek Banks) and c) Syrian refugee crisis (fluid geopolitical environment).

In addition, polls are showing that no political party will win majority. This means that the formation of coalition government won’t be an easy task and that it is highly probable that the caretaker government will govern the country for a certain period of time after elections. For this reason, it is not certain that Thanou will be selected as caretaker prime minister.

Greece, economic developments.

• According to the Ministry of Finance, Greece’s Jan-Jul budget ended up with a primary surplus of 3.7 bios euros.
• However, state revenues closed at 26.9 bios which are lower by 3.9 bios euros or -12.8% than expected. Tax revenues were lower across the board i.e. direct taxes were lower by -2.6 bios (-21.4%), from VAT revenues were lower by 0.5 bios (-7.2%), 0.5 bios less from real estate tax, 1.7 bios less revenues from ANFAs & SMPs, 0.9 bios less from indirect taxes (including VAT) etc. In general, tax revenues were lower by 3.4 bios euros which is -13.5% vs. target.
• Expenses excluding interest paid, closed at 23.2 bios which are 4.3 bios euros lower than expected, The reduction of expenses is the reason of primary surplus. However, state obligations to creditors have reached the level of 5.3 bios (it was 3 bios in Jan’15)
• Bank deposits increased to 130 bios (it was 127 bios before the agreement of July 13th but was at 160 bios in the end of 2014). NPLs have reach the level of 100 bios euros (it was around 80 bios in 2014 and before SYRIZA came on power), the situation deteriorated since the inception of capital controls. Both create a negative environment for the recapitalisation of Greek Banks
• The Foundation for Economic and Industrial Research announced the Index of economic sentiment dropped to 81.3 in July which the lowest since October 2012. PMI which shows expectations as regards economic activity for the coming months, dropped to 30.2 in July which a historical low (it was 46.9 in June 2015)

Risk assessment: Greece needs a strong government in order to drive both country and economy out of the current political and economic mess. In addition, the new government has to restore confidence in economy before the successful completion Greek Bank's recapitalisation.

The local Tax Office has collected 26.9 bios euros during the 7 month period and needs about 28.7 bios in 5 month in order to meet its fiscal targets. The new government will need a supplementary budget in order to meet its obligations with creditors.

In general, Greece is facing a budget derailment due to the following reasons:

1. the SYRIZA-led government focussed on negotiations with creditors but ignored economy. The reduction of liquidity and cease of payment of state obligations to vendors, due to political uncertainty, impacted negatively the income of regular economy and loyal taxpayers as well.
2. both SYRIZA and Independent Greeks came on power based on a populistic agenda which included themes such as  ’I don’t pay taxes’ and ‘I don’t pay Banks’.
3. when the SYRIZA-led government was negotiating with creditors in public, he was using populistic arguments such as haircut of nominal value of debt and/or ‘Greek debt is a bubble, Greece won’t pay’. Simultaneously it was passing the message to individuals and companies either to tax evade or to avoid payment of their obligations either to state and/or banks.

Even if Tsipras win elections, it would be very difficult to govern and meet all commitments of the 3rd memorandum. During his first pre-election interview, he sent various ambiguous messages which don’t show a strategy to win. For instance he tied to combine the anti-memorandum with reforms agenda.

This communication strategy combined with the extended SYRIZA's internal crisis, increase probability that Tsipras will see his popularity going south and either will support a coalition government (without participating) or will escape.