Greece’s Euro Dilemma Is Back as Minister Sees Volatility

30/10/2014

By Nikos Chrysoloras and Antonis Galanopoulos

Greek bond investors face a rollercoaster ride for the next four months as the government tries to contain the risk of snap elections, Minister of Administrative Reform Kyriakos Mitsotakis said.

Prime Minister Antonis Samaras has until February to pull together a supermajority in the national parliament to elect a new president or the anti-bailout opposition party Syriza will force a snap election. That would return Greek voters to their 2012 dilemma when the country’s membership of the single currency hung by a thread, Mitsotakis said in an interview.

“The reality is that there will be a climate of uncertainty until February,” Mitsotakis, 46, said in his Athens office overlooking the Acropolis. “Volatility is caused by the fear of snap elections and the possibility that these will be won by a party which is not normal.”

Greek government bonds plunged today, with yield on the country’s 10-year benchmark note rising 55 basis points to 8.12 percent at 12:48 p.m in Athens, the biggest jump in two weeks. The selloff started in September when Samaras moved to sever the international lifeline that has kept Greece afloat since 2010 and ended a two-year rally in Greek government notes.

Asked whether investors should just dump their Greek bond holdings until the next president has been installed, Mitsotakis said: “Don’t ask me, I’m just doing my job. Ask Syriza.”

Electing a President

To replace President Karolos Papoulias the coalition government needs the support of 180 lawmakers. Samaras’s alliance controls 155. Failure would threaten early elections by March which polls suggest Syriza would win.

Samaras’s plan to secure that vote involves shaking off the euro area and International Monetary Fund officials who have policed the budget cuts imposed since 2012 and angered voters. In the process though, he still needs to retain enough financial backup to keep investors onside.

“Some of the dilemmas that we had to answer in 2012 will definitely be posed again in February,” Harvard-educated Mitsotakis said. That year Greeks needed two general elections before Samaras could form a government to accept the bailout terms set by its official creditors. “Lawmakers will know what’s at stake,” Mitsotakis said.

Reform Commitment

Greek stocks fell 4 percent in Athens. The benchmark Athens Stock Exchange has fallen 16 percent in the last month, making it one of the worst performing major indexes tracked by Bloomberg. Greek government bonds have lost 8.4 percent in that period, more than any other sovereign security tracked by Bloomberg’s World Bonds Indexes.

“If Greece’s political system doesn’t show that it’s serious about its commitment to reforms, then government bond yields will remain high,” Mitsotakis said. “This should be understood by everyone involved and mostly from Syriza.”

Greece is negotiating with its international creditors over a precautionary credit line that would be available should market borrowing costs spike after the nation exits its rescue program at the end of this year, Samaras said on Oct. 17. The credit line may consist of funds from its existing bailout, originally earmarked for recapitalizing the country’s lenders.

“We just left the hospital, so we are not ready to run a marathon. For the moment, the best we can do is walks in the park,” Mitsotakis, who worked at McKinsey & Co. before becoming a politician, said. “The credit line is this transitional stage we needed.”

Strings Attached

Access to a credit line provided by the euro area’s crisis fighting fund would come with conditions attached and Mitsotakis, who leads the effort to overhaul Greece’s public sector, said that a Syriza-led government would never accept those terms.

“I don’t share the view that Syriza has gone moderate in its policy proposals,” he said. “I see the same party, the same people, the same divisive political discourse. About 40 percent of its executives wouldn’t mind Greece leaving the euro.”

For Mitsotakis, Greece has to stick to the path of economic overhauls and accept the terms of the credit line in order to finance the government next year. Tapping the bond markets or borrowing from official euroarea creditors remain the best options for the country, he said.

“The third option would be disastrous,” he said. “Exit the euro area and print your own currency. There are no other options.”

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