Everyone is sounding off on Greece in the wake of this weekend’s elections.”Not much is resolved from a medium-term perspective,” writes Morgan Stanley’s Europe Economic & Strategy team led by Daniele Antonucci. “Solvency is far from assured and, when Greece approaches a balanced primary budget a year from now, the incentive to attempt to renegotiate the programme even further, threaten default, or even an exit from the currency union, might rise again.”
Morgan Stanley fleshes out two major risks that still hang out there. From their note to clients:
Risk I: Even though the election outcome appears to be such that there are the numbers to form a pro-bailout government, whether this happens in practice remains to be seen. One risk is that PASOK leader Venizelos, according to a press report by Bloomberg (June 17), seems keen to see a broad national-unity government, encompassing not only pro-bailout ND, PASOK and perhaps the smaller Democratic Left, but also anti-bailout SYRIZA. Thus, the risk that such negotiations fail and lead to an inconclusive outcome remains high. Should this happen, markets might perhaps price in a higher probability of a near-term eurozone exit.
Risk II: The list of prior actions that Greece needs to comply with is long and substantial. The IMF Memorandum of Understanding published on March 9, 2012, says that “prior to the first disbursement of the new programme, the Government adopts the following measures, through a supplementary budget.” These measures amount to about €3bn, or 1.5% of GDP. And “some 7% of GDP in additional measures will be needed to attain the 2014 fiscal target”. Even though the Troika might make some small concessions, there’s a high risk that the loan tranche is disbursed with some delay, given that we are running at least six weeks behind schedule for Greece’s ability to make all domestic payments.
Basically, doubts remain on whether Greece will actually deliver a pro-bailout government that will be able to execute the austerity program that is necessary for those bailout funds.