Greece: Tsipras resigns following bailout approval, paves way for snap elections
August 31, 2015
After eight months in power characterized by fraught bailout negotiations, a country on the verge of bankruptcy and overwhelming uncertainty, Greek Prime Minister Alexis Tsipras resigned on 20 August paving the way for early elections. The move is seen largely as an attempt by Tsipras to bolster his support in parliament, after he had to rely on the opposition to push through a bailout agreement with the Eurozone. The EUR 86.0 billion bailout was passed by the Greek Parliament on 14 August with 222 out of 300 lawmakers voting for the agreement. However, a large faction of Tsipras’ SYRIZA party were opposed to the bailout and 32 of its 149 members voted against the bill, while another 11 members abstained. Following Tsipras' resignation, 25 members of SYRIZA formally broke away from the party and formed the new Popular Unity party, which will run against SYRIZA in the upcoming elections. Nevertheless, Tsipras is hoping that fresh elections will allow him to return to power with a majority and without the deep divisions among party members that has characterized his recent coalition government. The election is scheduled to be held on 20 September.
The third bailout agreement is at the heart of Greece’s political divide and has largely been seen as a U-turn for Tsipras and the anti-austerity platform that he campaigned on. The agreement contains tough economic overhauls including ambitious surplus targets, labor and pension reforms, as well as modernizing and reducing public administration. Greece received the first payment of EUR 13 billion from the European Stability Mechanism (ESM) on 20 August, which allowed the country to make a EUR 3.2 billion payment to the European Central Bank (ECB) on the same day. While the upcoming election has not sparked immediate “Grexit” fears so far, there is a risk that a political impasse while a government is being formed could delay reform progress and subsequently the program’s first review. Paolo Pizzoli, Economist at ING adds:
“In the short run, some short-term disruption seems unavoidable. Under the rule of the caretaker government, which will lead Greece until the polling date, the implementation of the reforms approved by the Greek parliament will almost inevitably be delayed, causing in turn a very likely delay to the first review of the new programme. The institutions will likely remain vigilant, but careful not to irrupt in the Greek political arena in a very delicate juncture.”
On the other hand, Mirco Bulega & Giovanni Zanni, Economists at Credit Suisse remark:
“We don't view Tsipras' resignation and the consequent early elections negatively, as it will probably mean having Tsipras back in power next month but without the most extremist members of his party in government. It also shouldn't affect the timing of the programme disbursements and of reform implementation. Despite the unavoidable volatility due to the upcoming elections, Greece is unlikely to be a source of systemic risk in the coming months, in our view.”
While in the short-term risks to the bailout agreement appear to be minimal greater uncertainties loom for the long term. There is still a possibility that the third bailout agreement could suffer from the same hurdles as the second bailout did. Namely, stalling or backtracking on reforms by the government, the Greek economy performing worse than expected—or overly-optimistic assumptions and an inability or unwillingness to meet fiscal targets. Moreover, short-term risks could emerge if the recently-formed Popular Unity party gains more support than anticipated or if Tsipras’ popularity wanes.