Bailout doubts for an unruly Greece

Greece's fragmented politics are throwing up some unlikely and unsavoury prospects for a coalition government. If the nation proves ungovernable, it could run out of money as early as July.

Athens is lurching dangerously out of control, after the failure of conservative leader Antonis Samaras’ to form a coalition government sharply increased the likelihood that the country will quit the eurozone.

According to the French newspaper Le Monde, Greek president Karolos Papoulias will now turn to the radical left party, Syriza, which received the second largest share of the vote at Sunday’s elections. Papoulias will meet with Syriza’s leader Alexis Tsipras later today, and give him three days to form a coalition government. Tsipras has said that he will try to form a left-wing coalition in order to reject the "barbarous conditions” imposed on the country in exchange for its second bailout.

But German Chancellor Angela Merkel has shown that she is not prepared to give Greece any latitude. Overnight, she warned Athens that it had to stick to the budget cuts and reform plans it agreed to in exchange for its second €130 billion ($US170 billion) bailout.

"It is of utmost importance that the programs that we agreed on with Greece continue to be implemented," she said. At the same time, the European Commission made it clear it had little interest in renegotiating the terms of the bailout.

If Greece is unable to form a government that is capable of negotiating the next instalment of bailout funds, the country could run out of money by July.

Economists at Citigroup now estimate the likelihood of Greece quitting the eurozone is as high as 75 per cent.

Greece appears doomed to a long period of political instability after Sunday’s elections put an end to the dominance of the two mainstream parties that have characterised Greek politics since the fall of the military junta in 1974. Voters punished the two mainstream parties – the Socialist Pasok and the conservative New Democracy – for agreeing to tough austerity measures in exchange for Greece’s second bailout.

New Democracy only picked up 18.9 per cent of the vote (or 108 seats), while Pasok won 13.2 per cent (or 41 seats). As a result, the two mainstream parties are unable to muster an absolute majority in the new parliament because together they only control 149 seats of the 300 seats.

Opposition parties – which campaigned on a strident anti-austerity platform – were the biggest winners in Sunday’s election, picking up 151 seats in the new parliament.

The biggest winner was Syriza, which saw its share of the vote more than triple from the 2009 elections to 16.8 per cent, giving it 52 seats in the new parliament.

But the opposition ranks also include the far-right, anti-immigrant Golden Dawn party, which uses neo-Nazi rhetoric and whose logo resembles the swastika, and which now has 21 seats in the new parliament. On Sunday night, its leader Nikolaos Michaloliakos promised to fight against "global loan sharks” and the "slavery” imposed on Greece in exchange for its bailout. "The hour of fear has rung for traitors to this country," he warned.

Investors are worried that the fragmented parliament, and the intense rivalries between the political parties will make it impossible for a stable government to emerge, and that fresh elections will have to be held within a few weeks. Sharemarkets saw heavy selling on fears that Greece is fast becoming ungovernable. In Athens, the main sharemarket index slid 6.7 per cent, while Greek banking stocks plunged by 12.6 per cent.

Markets are worried that anti-austerity sentiment is spreading to other debt-laden eurozone countries. In Italy, the centre-right People of Liberty, which is the largest party backing Mario Monti’s technocratic government, has threatened to vote against ratifying the eurozone "fiscal pact” unless the prime minister secures changes to the treaty.

Investors are also worried that Spain’s finances will come under intense stress after the Spanish government conceded it is working on a rescue plan for Bankia, the country’s third largest bank in terms of asset size.

The decision represents a major back-down by the Spanish government, which had previously insisted that no extra government money would be needed to clean up the country’s banks which are weighed down by bad debts following the collapse of the country’s massive property bubble.

The Spanish government is expected to inject up to €10 billion in fresh equity into Bankia by buying bonds that can be converted into shares. This is likely to increase Spain’s debt to GDP ratio in the short-term, but will not cause the budget deficit to blow out because Bankia will have to pay a market rate of interest on the bonds.

Still, investors have been unnerved that Mariano Rajoy is now showing a willingness to use government funds to rescue the ailing Spanish banks. "If it was necessary to reactivate credit, to save the Spanish financial system, I would not rule out injecting public funds, like all European countries have done,” he said in a radio interview.

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