GREECE: This Is What Comes Next



Greece's government is still up in the air in the aftermath of yesterday's elections.

The conservative party New Democracy announced earlier today that it will not be able to form a coalition government that would allow Greece to form a new government.

This means that only a handful of options are now available for the struggling country:


A successful last-ditch effort to form a government after a meeting with all party leaders.


Snap elections, as early as June 10 or 17.


PASOK forms a narrow coalition with a left-wing leader and support from both New Democracy and the Democratic Left. This would give them a narrow majority of 168 seats.

Each of the three leading parties gets three days to form a government. As New Democracy leader Antonis Samaras found such a prospect under his leadership hopeless, the buck now moves on to Syriza chief Alexis Tsipras. His far-left party has rejected the terms of the bailout, and called his party's views "diametrically opposed" to those of New Democracy.

Various experts, however, have told us that the likelihood of a Syriza-sponsored government is slim. Wolfgang Piccoli of the Eurasia Group wrote in a note today, "Any attempt by Syriza to create an alternative anti-bailout government composed by leftist parties is set to face a quick dead-end. Vast ideological differences, conflicting personalities and the mere parliamentary arithmetic make the creation of such a government impossible."

The buck would then pass to PASOK. A Greek source tells us that PASOK might be able to push through a coalition with a left-wing leader and support from New Democracy, however others doubt that support for such a coalition by a third party—like the Democratic Left, which rejected ND this morning—would be forthcoming.

If all three parties fail, Greek President Karolos Papoulias will call leaders of all seated parties together in a last-ditch effort to avoid new elections.

A second round of elections after failure to form a government would not be unprecedented, as such an event happened back in 1989. However, it is unclear that a new round of elections would actually change the voter distribution and empower the leading PASOK and New Democracy parties, which have the best chance numerically of coming together to form a coaltion.

The final scenario—new elections—would likely be the most devastating for markets, given that persistent insecurity about the likelihood of a Greek exit from the euro could ravage markets through June.

By the end of that month, the Greek government will have to decide on a new round of future spending cuts in 2013 and 2014, equivalent to 7 percent of GDP. The troika (EU leaders, the European Central Bank, and the IMF) are likely to withhold funding earmarked for Greece as part of the country's bailout programs until these measures are passed.

According to a government official cited by Dow Jones, Greece has enough money to last unti late July, though finances "will be tight." Since Greek leaders of all parties appear to now agree that Greece will need to renegotiate the terms of its bailout, this likely spells heightened uncertainty in the markets as we head into the summer months.


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