Greece’s big gamble threatens to plunge the eurozone back into chaos

So what's happened?

The Greek Prime Minister Antonis Samaras has decided to call a snap presidential election (due on 17 December). Since the presidency is decided by the Greek parliament, it means that he needs to get three-fifths of MPs to approve his choice. His problem is that since the governing coalition has a very small majority, due to defections over the ongoing austerity package, he may struggle to get enough votes. If he fails, he will have to call an immediate general election, over a year ahead of schedule. This is important since the anti-austerity Syriza are currently leading in the polls.

Why is he doing this?

Samaras' hope is that, by raising the prospect of an early election, he can force the defectors to approve his preferred candidate. This would signal to international investors and the 'Troika' (IMF, European Commission and ECB) his ability to carry out further economic reforms. At the same time he may be hoping that the prospect of him losing the vote of confidence will scare the Troika into modifying its position. This comes as European Finance Ministers have decided against allowing Greece to exit the bailout program this year, instead giving it an additional two months to improve its finances.

How are markets reacting?

If this is political brinkmanship designed to shore up the Greek economy by winning concessions from both domestic and international critics, then it doesn't seem to be working so far. Indeed, it seems to have spooked investors, with the Athens stock exchange falling by over 10% on the news, the biggest fall since December 1987. The spread between Greek and German bond yields has also gone up by 49bps. The yields on the bonds other highly indebted European countries have also gone up.

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What happens if Syriza wins office?

The reason why investors are so worried about a Syriza victory is because it has said that it will increase spending and demand that government (though not private) investors take large haircuts on Greek debt. This would almost certainly be refused, leading to the ejection of Greece from the eurozone. Syriza's leader Alex Tsipras has attempted to tone down his rhetoric in recent weeks, even promising that the government will not run a deficit. However, investors are also concerned that it would pursue anti-business policies. Indeed, Syriza was formed in 2004 as the result of mergers between several far-left political groups, including communists. Tsipras himself has expressed admiration for Mao.

What would happen if Greece left the euro?

At the moment Greece is running a primary surplus (ie excluding interest payments). This means that it could default on its entire debt without needing additional foreign funding. A lower currency would make Greek exports cheaper and boost tourism. This would help cut unemployment, still over 25% despite the return of economic growth. However, there are fears that it could set off a chain reaction, with investors dumping the bonds of other countries in a perilous financial situation. This could result in the euro being reduced to a "Northern European" core, or even disappearing completely.

What could Brussels do to prevent this?

One option would be for the ECB and European Commission to allow the guarantees that would enable Greece to leave the bailout programme. They could also allow a degree of fiscal loosening. However, they are clearly worried that this would set a precedent, encouraging other countries to miss their targets for bringing down their deficits. It would also be unpopular with Germany, and might not be enough to stop Syriza. The most logical solution would be for the ECB to start the long-expected program of quantitative easing, though again there is a large amount of German opposition to this.