Greek Confidence Vote is No Game Changer

The Greek government has called for a confidence vote today.   There is little doubt that it will survive it, but it will not change the dynamics that are inexorably leading the beleaguered country into a new test of its resolve and determination.  

The are 300 members of the Greek parliament.  Their are eight members of the Golden Dawn party that in jail awaiting criminal trials.  The government and its allies have 155 votes.   Greek bonds are rallying today.  

The 10-year yield is off 11 bp, leaving it still about seven bp higher on the week.    The yield is up 85 bp over the past month.  It is one of the worst performers globally.   The bond market rally stalled in mid-September, amid rising political uncertainty.    Prime Minster Samaras hopes that a vote of confidence will rally support and demonstrate the government's resolve to exit the aid program next spring. One of Greece's most vocal critics has been the IMF and its updated forecasts project Greece to be among the fastest growing developed economies next year.  

Samaras is right.  Political uncertainty is a being weight than macro-economics presently.  Samaras is wrong.  The vote of confidence will do little bolster investor confidence.    In some ways, it does not begin to address the real challenge.  

In a nut shell, the real challenge comes early next year, when parliament has to choose a new Greek president.  Samaras needs  a super-majority of 180 member of parliament to select the next president.  This, frankly, seems out of the reach of Samaras.  In fact, Tsipras, the head of the opposition Syriza party has sworn to block it, which in turn would force parliamentary elections.  And the opinion polls suggest Syriza could win such an election.   

Some observers warn that a Syriza victory would renew the existential crisis in the euro area.   However, the channel is not an exit from the euro area, as many had previously thought was highly likely.  Tsipras does not seem as anti-EU per se, as opposed to the austerity and neo-liberal agenda.  Tsipras has endorsed an 11.4 bln euro stimulus program (~6% of GDP).  He also wants to annul the laws that liberalized labor and product markets.   

Tsipras also has advocated a significant writedown of its debt.  Some have argued that once Greece achieved a primary budget surplus that the government would push for this, but it has not materialized, and Samaras has not shown any inclination.  

Tsipras is a different story, but there are different ways it could be played out.  Most of the historical examples cited by political scientists and economists of a default when a primary surplus is achieved are when the debt is largely in private hands.  Given the previous restructuring of Greece's debt, the debt is large in official hands--EU, ECB, and IMF.    Defaulting to these creditors is a different story.  However, the official sector could lengthen maturities and reduce interest rates in a way that private sector investors cannot or are unwilling to do. 

Some cynics may say that Greece then would be blackmailing its creditors:  Either they make concessions or Greece defaults.   But this is too harsh a reading.  It has long been indicated that such relaxation of terms is possible after Greece has demonstrated its commitment to the reforms and fiscal targets established by the Troika.  What would be happening is a negotiation over those terms.   

In any event, it is the drama over selecting the new Greek president early next year is where the proverbial rubber hits the road.  Surviving the vote of confidence today means little in terms of that more important drama.