Greece: Assessing the Electoral Aftermath

By Richard Schwartz

Bank stocks have been punished by the markets. Is the panic overdone?

While the week following the Greek election saw equity markets in a spin, neither the victory of the hard-left Syriza party of new prime minister Alexis Tsipras nor the post-election pronouncements from the government have come as a surprise.

The mood in Greece in the run up to the election was one of disenchantment. There was general agreement that the taste of austerity was bitter and the side effects extremely unpleasant. The argument was over whether it would eventually cure or kill the patient.

In the post-electoral turmoil, the focus shifted back to the Greek banks and their ability to weather the political storms ahead. The major banks suffered a bruising week on the market with share prices dropping and debt yields spiking. Yet Platon Tinios, an economics professor at University of Piraeus and Special Advisor to the Prime Minister of Greece from 1996 to 2004 says the economic outlook for both the banks and the economy as a whole is, in fact, reasonably positive so long as cooler heads prevail.

Nor is the Greek economy short of innovative opportunity. Charles Legrand, a former regional manager for SWIFT now advises and trains local start-ups in how to market themselves to potential financial backers. “Despite the economic climate, there is a lot of innovation in Greece,” he says. “Several new app projects have, for example, made it to Silicon Valley funders.” Legrand suggests that the New Democracy party – the largest component of the previous coalition government – suffered the consequences of having failed to engage with younger voters.

Tinios meanwhile acknowledges that the first few days after the election appeared chaotic. “We cannot have 30 small revolutions all at once,” he says. “The government needs to coordinate and prioritise its battles, rather than opening several fronts at the same time.”

Investor panic is essentially a response to cacophony. “There are too many people talking all at once,” says Tinios. On the one hand, he suggests, investors may have been lulled into complacency in the period preceding the elections. The new government also needed to remind its own electorate that they meant what they were saying. “In due course, I would expect the markets to provide a reality check,” says Tinios. “Indeed on Wednesday, the deputy prime minister Giannis Dragasakis tried to dampen things down, reassuring commentators that things would not move quite as fast as some ministers had led people to believe.”

Tinos says the government would be well advised to secure the necessary liquidity before launching into confrontational negotiations. “After another week in office, they’ll see that there are pressing matters to do with financing of the state,” he says. He points out, however, that the finance minister Yanis Varoufakis is an academic expert in game theory. “He may have decided that our best negotiating ploy is the disaster that would be caused if negotiations were to break down completely,” he says. “If that is their strategy, it may be quite a dangerous one as it risks accidents along the way.”

Nevertheless, says Tinios, “I think the long-term outlook is rather better than people think. Greek competitiveness is better than it was and the Greek economy is in much better shape than it was in 2010.”

The government will have to learn to manage both external expectations and those of its own supporters. “The government has only been in place for a few days, so there is a lot of gesturing towards the internal audience. That has spooked some people, but looking at it from the inside, the government has said no more than expected.” Rather, says Tinios, it is pace of pronouncements that has been dizzying.

Bank health

As for the banks, he says, their fundamentals are much better than their short-term outlook would suggest. “For investors with a cool head, they’re probably a good buy,” he says. “They have adapted an awful lot; they have consolidated, reduced their staff, closed down branches and increased their capital base.” He contrasts the banks’ position today, where they are facing a potential liquidity challenge rather than a solvency problem, with the situation a few years ago, which was the reverse. “In 2010 we had a severe economic crisis,” says Tinios. “Now we have a political problem, but the economic situation is much better.”