Syriza’s Post-Election Challenge: An Empty Greek Treasury

Victorious Antiausterity Party Led by Alexis Tsipras Has Limited Time to Strike Deal With Greece’s Creditors

The Wall Street Journal

By MARCUS WALKER

Updated Jan. 25, 2015 8:11 p.m. ET

The clock is ticking for Syriza—the victorious antiausterity party in Greece’s elections—to strike a deal with creditors to keep Greece solvent and in the euro.

It wasn’t clear yet late Sunday whether the left-wing party had won more than half of the 300 seats in Greece’s parliament, though Syriza moved quickly to form a governing pact with a small nationalist, antiausterity party, the Independent Greeks. The big challenge now lies in Greece’s empty treasury, and in a game of chicken with Europe.

Greece—one of 19 countries that use the euro—needs billions of euros in coming months from other eurozone governments and the International Monetary Fund to avoid defaulting on public debts. Greek banks also need continual liquidity from the European Central Bank. Europe’s current bailout plan for Greece expires on Feb. 28. A successor can’t wait too long.

Syriza says it wants to replace the bailout plan, with its tough requirements on budget rigor and economic overhauls, with a new agreement that relaxes austerity, reverses free-market reforms, and relieves some of Greece’s debt burden. Officials in Berlin and other key eurozone capitals say Greece must stick to the agreed path of rigor and reform if it wants further financing.

The stated positions are miles apart. A deal on the budget and debt looks difficult but possible. Syriza wants to run a primary budget surplus (excluding interest) of 2% of gross domestic product, instead of the current target of 4.5%.

A budget compromise would probably entail some restructuring of European bailout loans, to make Greece’s debt trajectory look sustainable. Eurozone governments could promise to further extend loan maturities while further reducing and postponing interest payments. They have done it before.

Structural reforms could be thornier still. Syriza wants to reverse steps already taken to deregulate and privatize parts of Greece’s economy. Germany and other creditors want such overhauls taken further: They see them as essential for making Greece’s economy more viable inside the euro. An about-face by Syriza could test its internal unity.

German Chancellor Angela Merkel , Europe’s most powerful leader, wants to avoid a Greek exit from the common currency, which would risk inflicting heavy losses on eurozone taxpayers and could hurt Germany’s reputation, people familiar with her thinking say. But she needs a counterparty in Athens, these people say: a government that is willing to make Greece more frugal and competitive.

Unless Syriza caves in, and is helped by face-saving concessions by Europe, Greece risks running out of money by summer or earlier. That looming prospect would have the potential to trigger bank runs and capital controls. If Greece can’t finance its government or banks in euros, it would be forced to print drachmas.

Greece lacks the cash to repay bonds held by the ECB that fall due in July and August. Eurozone officials say that they fear Greece might even run short of cash to repay its IMF loans that are falling due in March, because this winter’s Greek political turmoil has hurt the economy and tax revenues.

Even before those deadlines, rising anxiety that Syriza won’t be able to meet Europe’s terms for new credits could spook Greeks into accelerating their recent withdrawals of bank deposits.

If deposit flight were to take off and talks with creditors got stuck, the ECB could find it increasingly hard to justify financial support for Greek banks—even in the form of so-called Emergency Liquidity Assistance from Greece’s central bank. The ECB would need at least the prospect of a likely deal on a new Greek bailout program, or it would likely have to pull the plug at some point, analysts say.

Finding agreement looks “extraordinarily difficult,” but the costs of failure would be huge for everyone, said Gabriel Sterne, head of global research at Oxford Economics. “Someone has to blink quickly.”

Write to Marcus Walker at marcus.walker@wsj.com

http://www.wsj.com/articles/syrizas-big-post-election-challenge-an-empty-greek-treasury-1422224892