Greece: can't pay, won't pay or just has to pay?

As expected, Greece’s Syriza party swept to victory in a country that’s sick and tired of six years of austerity, cuts and unemployment and is desperate for a change. Slightly less expected, the markets have broadly taken this apparent lurch to the radical left in their stride.

In early Monday trading, the euro fell a bit in Asia but bounced back to actually rise against the dollar. The stock market was down nearly 5% in Athens but that followed a 6% rally last Friday. Although the yield on Greek government bonds rose, the dominant influence remains last week’s announcement of quantitative easing by the European Central Bank, keeping a lid on peripheral bond yields. Amid all the dramatic headlines about Syriza’s “firebrand” leader, Alexis Tsipras, and the renewed possibility of a Greek exit from the Eurozone, this might seem surprising. In reality, it is a great example of financial markets’ ability to see the facts behind the sentiment and to price in news well ahead of events actually unfolding.

So what sort of a leader will Mr Tsipras turn out to be? And how far will he push his pre-election promises to reverse cuts and renegotiate the terms of the bail-out that has kept Greece afloat since 2010? There is a world of difference between what politicians say before they take up the reins of power and what they are able to do when they are finally in charge. In the case of Syriza, the party’s rhetoric became noticeably less extreme as the election approached. Comparisons have been made between Alexis Tsipras and George Papandreou, Greece’s prime minister in the 1980s and a previous radical who ended up adopting a much more pragmatic approach than many feared at the time of his election in 1981. That was despite the fact that he had a great deal more room for manoeuvre than Tsipras does today. Public debts amounted to about 25% of GDP in the early 1980s in Greece, compared with 175% today. The vast expansion of the public sector then (arguably the start of Greece’s problems today) is simply not repeatable.

The new Government will find itself between a rock and a hard place, attempting to keep the far-left radical wing of the Syriza party happy while simultaneously keeping its creditors on side. Greece can say what it likes but the bottom line is it will run out of money by the summer without the continuing financial support of the so-called Troika of the EU, IMF and European Central Bank. Persuading the EU to renegotiate the terms of Greece’s bailout will also be challenging because the financial conditions are already much more lenient than those applying to other Eurozone countries like Italy and Portugal. Greece has already benefited from two rounds of relief that have cut the servicing costs of its debts. For example, the maturity of the loans provided by other member states in 2010 has been extended to 2041 while the interest rate has been reduced to just half a percent above the Euribor benchmark. That means that the average term of Greece’s debt now stands at more than 16 years, double that of Germany and Italy.

The amount that Greece pays in interest on its debts is currently only 4.3% of its GDP, a lower proportion than in Italy and Portugal. In fact, take into account the interest holiday from the European Financial Stability Facility and the refund of interest from the ECB and other national central banks and the real interest burden may be even lower. In those circumstances, it is hard to see the Eurozone’s other peripheral countries condoning any further relaxation of Greece’s conditions. And as for Germany, which is philosophically committed to holding Greece’s feet to the fire, there seems little prospect of any back-pedalling on its recently re-stated hard line. So, the next few weeks promise renewed focus on the sustainability of the Eurozone.

The market’s initial response suggests, however, that investors are less concerned than they were four or five years ago. This feels more like muddle-through than existential crisis.

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