By Dimitri Balatsos.
The upcoming Greek elections on Sunday, January 25 have whipped political and economic pundits into frenzy. At the heart of the excitement is a possible win by Syriza, the left-leaning political party. This relative new comer on the political stage has promised a slew of populist programs, which include doing away with fiscal austerity, rolling back reforms, and renegotiating bailout terms with the country’s creditors.
There is no sure way of outguessing the outcome of this tight contest mostly between “the devil you know” – the ruling center-right coalition – and Syriza “the devil you don’t know.”
After five years of austerity that has wiped out a generation and dramatically lowered living standards, the conservative party New Democracy has lost its allure, while Pasok, a previously dominant political force with a socialist manifesto, has shrunk to a shadow of its former self. This has greatly strengthened the appeal of Syriza and its promise for change.
The fiery rhetoric of its leader, Alexis Tsipras, notwithstanding, there is little reason to suspect that Syriza will be able to follow through with radical political reforms if he were to score a victory. To be sure, some promises aimed at boosting the party’s electoral appeal (e.g., a raise of the tax-free threshold, an increase in the minimum wage, free electricity and food stamps for poor families, and an extra check for poor fixed-income pensioners) are likely to find support. They intend to soften the blow of the harsh austerity measures in place, but also echo a similar anti-austerity sentiment coursing through other hard-strapped EU members.
Grexit, or Greece exiting the euro, a serious investor concern, was abandoned by Tsipras a while back, but Syriza has yet to come round to tamping down the bluster of external debt restructuring. Getting the Troika (IMF, ECB and the European Commission) to renegotiate Greece’s public sector debt will be a hard sell. Similarly, asking private investors to take yet another haircut is likely to undermine the country’s ability to access public markets in the future.
Far from trying to analyze Greece’s daunting economic problems and complicated political landscape, this brief note serves as a reminder that often pre-election posturing gives way to pragmatic policies even after radical parties have gained power. An example of such transformation is Brazil with the election of Luiz Inacio “Lula” de Silva as president in 2003. The large differences between the two countries notwithstanding, there are some similarities in the political and economic backdrop. Lula then, like Tsipras today, was steeped in socialist dogma and anti-capitalist sentiment, having been a metalworker and a founding member of PT (Partido dos Trabalhadores) or Workers Party. Brazilians then, like Greeks today, were expressing wide dissatisfaction with President Cardozo, the establishment’s candidate. The softening of PT’s proposals provided succor to Brazil’s middle class which was facing economic hardship. At the time of Lula’s election, Brazil, like Greece today, was caught in the midst of a deep recession. The appointments of Antonio Palocci, a down-to-earth pragmatist capable in navigating Brazil’s political landscape, as Secretary of the Treasury, and Henrique Meirelles, a senior, global executive with the Bank of Boston, went a long way to dampen skepticism and mistrust in the financial markets and boost confidence among investors.
Despite Brazil’s fragile economy, Lula and his economic team introduced austere monetary and fiscal policies to address the country’s soaring inflation and large social expenditures, policies more typical of conservative governments. The PT was able to implement these policies thanks to a working coalition, recognizing that the party itself was not likely to have a majority of seats in Congress to run the country. It is plausible that a similar scenario may play out in Greece in the upcoming elections.
Though difficult times lie ahead, today Greece appears ready to move past the worst of the hardship and a fragile recovery is possible. The economy was the fastest growing in the Eurozone in 4Q2014 according to EU’s statistical agency, and it is forecast to be the only member in EU, other than Germany, to have a near zero budget deficit (the primary budget that excludes debt service payments is already showing a surplus). In our view, the odds favor a coalition government led by Tsipras to win the election. If he and his partners took a leaf or two out of Lula’s playbook and transformed political rhetoric into pragmatic policies, EU most likely will continue to support Greece. For investors willing to take some portfolio risk, Greece, like Brazil twelve years ago, may present an interesting opportunity.
*** Dimitri N. Balatsos is the Founder, Managing Partner & Chief Investment Officer of Tesseract Partners, an investment advisor specializing in global asset allocation strategies and portfolio management for institutional and private clients worldwide. Prior experience includes: Senior Portfolio Manager, Lombard Odier International Portfolio Management, Ltd, London; Director, Global Investments, Kidder, Peabody & Co., New York; Senior Economic Adviser, International Division, Manufacturers Hanover Trust Company, New York.