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Fixed income
08 Jul 2019

Greece: Electorate takes a turn to the right

Nick Wall, co-manager of the Merian Strategic Absolute Return Bond Fund considers the economic implication of New Democracy’s win in the 2019 Greek election.

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Four years ago, when Greeks elected Syriza’s Alexis Tsipras, it was on a defiantly anti-establishment, anti-bailout platform. Yesterday, they elected New Democracy’s Kyriakos Mitsotakis, scion of a Greek political dynasty with strong ties to business and on the promise of structural reforms. So, what has changed?

Most obviously, Tsipras endured a disastrous start in 2015 as Greece attempted to extract better terms from the European Troika (the European Commission, European Central Bank and International Monetary Fund). By betting on contagion, the Greek approach backfired spectacularly given European Central Bank (ECB) president Mario Draghi’s “whatever it takes” mantra, which shielded other peripheral bonds; instead, capital flowed out of Greece. This brought the banking system to its knees and made it reliant on emergency liquidity assistance from the ECB. And following the referendum calling for a rejection of the creditors’ terms, capital controls were implemented. Despite the eventual “kolotoumba” (somersault), the Tsipras gamble caused huge economic damage and led to a punishing bailout.

The terms of the bailout included the requirement of large primary surpluses (in simple terms, when tax revenues exceed spending) and these large surpluses required higher taxes, thereby squeezing the middle class. At the same time, the submission to the Troika lost Syriza some support from the left. The unemployment rate remains stubbornly high at 18% and businesses have long complained that red tape has stifled growth. That said, former Prime Minister Tsipras did bring economic stability after 2015, overseeing a big drop in Greek government bond yields. However, this didn’t translate into strong economic growth.

Prime Minister-elect Mitsotakis looks set to take a different approach, arguing that deeper structural reforms will allow him to reduce the taxes that smothered the middle class as investment picks up. New Democracy is part of the European People’s Party, the leading group in the European Parliament, so it may be able to convince its European partners of the merits of its proposed  strategy. The market, and Greek voters, will also be waiting to see whether his promises to root out nepotism and cronyism are adhered to. Meanwhile, investors will be assessing whether his policies reduce the cash buffer that lowered the rollover risk – the risk associated with the refinancing of debt – faced by Greek bond holders, and encouraged heavy buying of short-dated bonds.

The groundwork has been laid in the latter half of Tsipras’ term and Mitsotakis’ approach could see growth recover more aggressively if fully implemented. We are staying long Greek risk.