- Austerity measures are being implemented, particularly the placement of 25,000 public sector workers into ‘reserve’ (from where they can be fired after 8 months)
- The governing centrist coalition has had its majority in the 300-seat parliament reduced from 167 to 155 due to a junior coalition member quitting over austerity measures
- Greece has achieved primary surplus, which means that the austerity is enacted purely to pay the official sector cost of interest on loans. However, the probability was low to begin with.
While we do believe that the three factors above have increased it, we are talking a jump from somewhere in the single digits to 10-15%. This is because:
- Euro area exit is unpopular in Greece. Even the far-left SYRIZA has caught on that Greek voters fear uncertainty and therefore do not want to risk Grexit.
- Post-German election, an OSI (Official Sector Involvement) is likely, with further cuts in interest rate payments and extension of debt maturity at the very least
- Greeks have an upper hand in negotiations due to reaching primary surplus, so they will likely eventually receive OSI
An OSI is not an option, and cannot be discussed, in the run-up to the German elections. So it won’t be. However, it is the likely outcome eventually of another Greek showdown. German election is two months away, including August which is usually completely dead in terms of news flow out of Europe. As such, it is highly unlikely that Greece will come up before the election. Particularly not after they already received the funding from the official sector and have passed the necessary legislation. As they fail to deal with implementation of austerity, and further disappointment with privatization, Greece should flare up again as an issue in late-2013. Post-German election, however, Merkel will have the necessary political capital to shove it under the proverbial carpet.