Greece vote tempers threat of eurozone departure

Market and European officials' fears eased somewhat after a party that favors meeting European Union demands for ongoing bailout money won the most seats in Greek parliamentary elections.

The New Democracy party won 29.4 percent of the vote and seems best positioned to form a new government as the Greek electorate pulled back from the possibility of a eurozone departure and a return to the drachma. Investors have feared a Greek departure from the euro could deepen the economic woes in Spain and Italy and threaten the overall stability of the currency zone.

“There is now breathing space for the Greek political system to form a stable government, but it is hardly the end of the crisis,” says Charalambus Tsardanidis, director of the Institute of International Economic Relations in Athens. “Our situation is unsustainable and the new government will try to meet demands..., but any real outcome requires an overall change in the eurozone approach.”

Center-right New Democracy leader Antonis Samaras is today urgently seeking a stable coalition able to negotiate with the EU. New Democracy, one of the two establishment parties that oversaw Greece's descent into penury over the past decade, will receive an additional 50 seats in parliament for having come in first.

But the vote also sets up hard questions and ongoing divides between Berlin and other eurozone capitals about how and to what extent to keep shoring up Greece. Officials in Athens hint that they want as much as an additional two years to regain their footing, while German Chancellor Angela Merkel today said the terms of Greek reform and payback should not be altered. 

Nor was the Greek vote decisive. The new far-left Syriza party that ran on rejecting the EU bailout deal came in with a 26.9 percent share, only three points behind Samaris’s party, showing a fractured political consensus.

The issue is on the docket for discussion at the Group of 20 meeting in Mexico starting today and will be discussed in a June 22 meeting between the leaders of Italy, France, Germany, and Spain.  

“The elections are a signal that there won’t be any breakout of Greece from the euro. The ball is now in the European court to find a way to avoid a complete Greek bankruptcy,” says Philippe Waechter of Natixis Asset Management Group in Paris. “You have to now negotiate a bailout plan to give oxygen to a Greek economy grasping for air, and after a strong showing by the Greek far-left party Syriza.”

The former ruling party of PASOK, headed until last fall by George Papandreou, announced today that it would join the coalition and support the bailout package, dropping its condition made in the last 48 hours that it would only join the coalition if the upstart Syriza also joined. PASOK scored 13 percent in the elections. 

“Without PASOK, there will be no government,” says Mr. Tsardanidis.

Mr. Papandreou, the former prime minister, today called for a new "supplemental" growth package out of the EU that would add to but not change the bailout deal hammered out over the past year, and called for the creation of "eurobonds."

Since the spring of 2010, after revelations that Greece had been cooking its financial books and hiding deficits for years, the EU and the International Monetary Fund have given some $190 billion to Greece in aid, according to Thibault Mercier, economist at BNP Paribas, in Paris.

"Added to this,” says Mr. Mercier, is “nearly 79 billion euros in loans from the [European Central Bank] to Greek banks and 49 billion lent directly by the ECB to the Bank of Greece, which makes almost 130 billion euros in loans towards the Greek banking sector."