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Greece Moving Closer to Eurozone Exit, Default

Here’s the latest on the post-election tumult in Greece. After New Democracy (center-right) Party leader Antonis Samaras failed to form a government, the number-2 party, the Coalition of the Radical Left (known as Syriza), was given a chance. And they basically ruled out a coalition government.

Greece’s post-election political and economic chaos deepened on Tuesday, when the leader of a leftist anti-austerity party that gained in the balloting ruled out a coalition with the two formerly dominant parties that had backed hugely unpopular budget cuts.

In a meeting with President Karolos Papoulias, the leader of the upstart party, Alexis Tsipras, ridiculed his counterparts of the two other parties, Antonis Samaras of the center-right New Democracy Party and Evangelos Venizelos of the Socialists, whose coalition lost its governing majority in the Sunday parliamentary election […]

“If Mr. Samaras and Mr. Venizelos genuinely regret their disastrous decisions, let them write to the E.U. and I.M.F. leaders tomorrow, revoking their signatures,” Mr. Tsipras said. “If they don’t, I call on them to stop duping the Greek people,” he said, referring to appeals by the New Democracy and Socialist leaders for the formation of a national salvation government based on the terms of the bailout.

This was expected, but it was quite blunt and humiliating to the legacy parties, and considering the results of the election, it almost assures a new round of voting. The legacy parties only have 32% of the vote, and the biggest party outside the legacy just said they would never join such a coalition. So getting to 50% looks impossible. Tsipras wants to build a leftist coalition that would abolish the bailout deal with European leaders, restore some of the labor rights from changes put into place last year and put a moratorium on Greek debt payments. This would almost certainly lead to an exit from the euro. Furthermore, there don’t seem to be enough votes in Parliament yet for such a coalition, especially because the Communist Party, which received around 7%, said they would never join a coalition government with anyone.

But the new elections in and of themselves may lead to a euro exit. Greece is required under the current agreement to cut the budget up to 11 billion euros by June. But new elections would probably not even lead to a sitting Parliament by that time. And anyway, the current trajectory assures that anti-austerity lawmakers will hold a majority in that Parliament; 2/3 of the votes last week when to parties opposed to the terms of the rescue deal. European leaders have a new deadline of August to release another tranche of aid. I think it’s becoming clearer that they will withhold it. After all, Tsipras just essentially ruled out the entire deal.

So now we’re back to worrying about a disorderly exit and contagion across the eurozone. The markets have begun to price in this anxiety. I think some of the fears are outsized, and the status quo badly needed a shakeup. Greece was sunk if they adhered to the current program, and anyway it was far too draconian for their public to tolerate. It’s not so much that Greece will cause whatever chaos emerges from the euro crack-up as they were forced into that position. When they leave it will be the right call in the long run.

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David Dayen

David Dayen