Greek Bond Investors Look to Confidence Vote for Respite

By Nikos Chrysoloras and Antonis Galanopoulos  Oct 10, 2014 11:14 AM GMT+0300

Bloomberg

After a monthlong rollercoaster for Greek government bonds and stocks, the country’s lawmakers are poised to give investors a brief respite.

The Parliament in Athens, scene of repeated all-or-nothing ballots on austerity measures throughout the debt crisis, again shifts center stage this evening as Prime Minister Antonis Samaras puts his government to a confidence vote. Samaras has tabled the motion to head off an opposition challenge and win fresh backing for his stance on outside aid, buying some breathing space in the process.

The move is intended “to show there’s political stability in the country and diminish the chances of a snap election in the next months,” Costas Panagopoulos, chief executive officer at Alco, an Athens-based polling company, said by phone. “The target is to calm the markets, even briefly, and solidify support for the governing coalition among its lawmakers.”

Greek 10-year bond yields fell 10 basis points to 6.59 percent yesterday on the eve of the vote after jumping 34 basis points in the previous three days. The yield was at 6.6 percent at 10:16 a.m. local today.

A record rally in government bonds that began when Samaras took office in June 2012 fizzled out in recent weeks as investors woke up to the political risks still at large in Greece. Foremost is the challenge of replacing the country’s president, Karolos Papoulias, whose term is nearing its end. Samaras needs a supermajority of lawmakers to elect a new head of state, and failure to do so would threaten early elections by March.

Parliamentary Majority

While the prime minister commands 155 lawmakers in the 300-seat parliament, allowing him to win tonight’s confidence vote barring unexpected defections, the task of rallying the 180 lawmakers necessary to choose a presidential candidate in February is more daunting.

“The recent selloff in Greek bonds and stocks certainly owes much to the significant challenges in the political environment” said Dimitrios Katsikas, head of the Crisis Observatory, an Athens-based think-tank. He cited the rising probability of early elections and “the increasing likelihood of a change in government, with a victorious Syriza adopting a radically different policy program that could jeopardize the progress made to date.”

Political Instability

More than four years and as many prime ministers after Greece first requested outside help at the start of the euro-area crisis, the government is still prone to instability as it pushes through the budget cuts and economic overhauls demanded by the so-called troika of international donors: the International Monetary Fund, the European Commission and the European Central Bank.

Alexis Tsipras, leader of the opposition Syriza party, has said he will force early elections by blocking the president’s appointment. Polls suggest that Syriza, which advocates a significant writedown on Greece’s debt, would win the vote.

The government, by calling a confidence motion, wants to spike the opposition’s guns and win space for a period free of election talk “to complete the negotiations with the troika and set the conditions for a sustainable market return,” said Filippos Sachinidis, a former finance minister who is a lawmaker for Pasok, the junior coalition partner.

Balanced Budget

Greek bond yields fell as low 5.52 percent on Sept. 8, the lowest since early 2010, after recording a record high of 44 percent in March 2012. An improvement in Greek public finances and low interest rates have emboldened Samaras, who said as recently as two days ago that he aims to sever the international lifeline that has kept Greece afloat since 2010.

Samaras steered Greece’s return from a four-year market exile in April, and the government foresees an almost balanced budget in 2015, when the IMF predicts the country’s economy will grow faster than most developed nations.

All that could be derailed if Syriza, an acronym for Coalition of the Radical Left, wins the next election. Tsipras has promised a stimulus package worth about 11.4 billion euros ($14.5 billion), or almost 6 percent of Greece’s gross domestic product, and the annulment of hundreds of laws liberalizing Greece’s labor, product and service markets. The Finance Ministry has said the bill for Syriza’s pledges will be much higher, and will cause an immediate fiscal crisis in Europe’s most indebted state.

Belt-Tightening

After years of belt-tightening which exacerbated the worst recession on record and left more than a quarter of Greece’s workforce jobless, Syriza’s pledges are winning over voters. Polls show a growing lead for the opposition, piling pressure on the government to come up with policies of “popular appeasement, including an early exit from the bailout agreement or the postponement of a number of reforms,” said Katsikas.

The plan to put an end to bailout disbursements is meeting resistance from Greece’s creditors who argue that the country’s access to bond markets is still fragile. As the results loom of an ECB-led bank check which could show more capital shortfalls for Greek lenders, some analysts estimate that Greece won’t be able to cover its financing needs without troika financing.

“The country would be in our view in a better position if it had precautionary support” IMF’s managing director Christine Lagarde said yesterday.

Political uncertainty adds to the jitters. Even if, as analysts predict, Samaras wins today’s confidence vote, it won’t help him during the election of a new president, said Nikos Voutsis, a Syriza lawmaker, said by phone. The vote will simply reaffirm the coalition’s fragility, he said.

Whatever signs of relief emerge tonight will be short-lived, according to Katsikas.

“The vote of confidence could help calm down things on the government front for a few weeks,” he said. “It won’t resolve the fundamental issue of the overall direction of economic policy in the months and years to come.”

To contact the reporters on this story: Nikos Chrysoloras in Athens at nchrysoloras@bloomberg.net; Antonis Galanopoulos in Athens at agalanopoulo@bloomberg.net

To contact the editors responsible for this story: Alan Crawford at acrawford6@bloomberg.net; Vidya Root at vroot@bloomberg.net Ben Sills