Next Greek Leaders Face Olympian Hurdles

 

The winners of Sunday’s Greek elections will inherit a central government nearly out of cash, an economy in free fall and a restive public tired of austerity measures.

With less than a week to go before the polls, there is also mounting concern that no party will win enough support to tackle these problems and that any new coalition could collapse within months.

The prospect of more political uncertainty in Athens could complicate Greece’s efforts to satisfy its international creditors and risks further aggravating the euro zone’s widening debt crisis, which is now engulfing Europe’s vulnerable south.

If Greece’s new leaders are unable, or unwilling, to meet the conditions imposed as part of a €173 billion ($216 billion) bailout from the European Union and International Monetary Fund, Brussels could pull the plug on aid, effectively pushing Greece out of the common currency.

Greece’s restructuring program is already well off track, following weeks of political paralysis before and after inconclusive elections last month that failed to produce a new government. A new government will be under enormous pressure to move swiftly with more cost cutting.

Under terms of Greece’s rescue package, Parliament needs to come up with ways to cut state spending by an additional €11 billion or more by June 30.

“Will these elections produce a stable government? Almost certainly not,” said David Lea, a London-based analyst at Control Risks, an independent risk-consulting firm. “If the next government lasts a year it will have done quite well.”

Others say the next government may last only a matter of weeks as Greece faces a perfect storm of rising social unrest, economic collapse and political deadlock.

The elections are shaping up to be a de facto referendum on Greece’s future with the euro, pitting the radical leftist Syriza party—which opposes the terms of the country’s latest bailout—and their conservative rival, New Democracy, which largely supports the bailout program.

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Recent public-opinion polls show Syriza neck-and-neck with New Democracy, making the outcome too close to call, as the two battle for seats in Greece’s 300-member Parliament.

Whichever party finishes first will win an almost unassailable advantage in forming a government, because under Greek election law, the party that wins the most votes is awarded an extra 50 seats in the legislature.

If New Democracy finishes first, it will likely have just enough votes to form a slim governing majority with the socialist Pasok party, if Pasok can muster a third-place finish.

If Syriza finishes first, it will likely team up with the small, Democratic Left party—which split from Syriza two years ago but maintains close ties—giving the two left-wing parties potentially just enough seats to form their own coalition. In either case, those majorities are likely to be wafer thin and may not survive the tough decisions that lie ahead.

In a sign of the uncertainty among Greek political leaders that a stable government will emerge from the elections, Pasok leader Evangelos Venizelos has already called for a grand coalition to govern the country.

“If we think of every likely election result, every likely support level and every possible form of cooperation, we will see that none of them lead to a solution,” Mr. Venizelos told reporters Sunday. “All of them lead to a continuing lack of government.”

The new government that will emerge after the June 17 elections—if there is a clear winner—will start well behind the curve and will have to scramble to meet conditions set as part of the EU and IMF bailout.

For more than two months now, as Greeks have waited for a new government to lead the country, reforms ranging from new tax measures to a bank recapitalization plan have all been put on hold, while the country’s ambitious privatization program has been frozen and tax collections appear to have slackened.

The first task of the new government will be to detail spending cuts to reduce expected budget gaps over the next two years. Those cuts, according to the timetable laid out in Greece’s latest loan memorandum must be passed by Parliament by June 30, just days after a new government would take office.

A failure to meet these targets could, once again, jeopardize disbursements of badly needed aid for Greece’s cash-strapped government, which has only enough money to cover its needs through mid-June.

In May, Greece’s European creditors held back €1 billion pending the outcome of the elections, and that could be disbursed to help tide over the country for a short while.

But the next aid tranche won’t be released until after Greece’s troika of inspectors—from the EU, IMF and European Central Bank—visit Athens to assess the state of the reform program. That visit hasn’t been formally scheduled, but is expected to take place soon after a new government is sworn in.

Both the euro zone and the IMF have already warned that Greece has to stick with its belt-tightening program if it wants loan payments to continue. “There is no more patience for Greece. Many in the euro zone and the International Monetary Fund reckon that it won’t keep its end of the deal,” said a person familiar with the loan program. “Structural reforms like cutting down its public sector, privatizations, opening up of closed professions and others have been voted into law, but never carried out.”

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