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Sep 21, 2015 | 15:36 GMT

4 mins read

After Elections, Greece Turns to the Economy

(LOUISA GOULIAMAKI/AFP Photo/Getty Images)
Summary

Questions over Greece's political future appear to have been answered, but economic questions remain. Prime Minister Alexis Tsipras was re-elected during general elections Sept. 20, and though EU officials welcomed his victory, they have urged Athens to focus on economic reform. And that is just what the government will do. By the end of October, Athens will have to review the budget for 2015 and present a budget for 2016 that includes substantial spending cuts. To comply with its bailout terms, Athens will also have to introduce tax hikes for farmers, introduce reforms in the labor market and continue with the privatization of state-owned companies — all before the end of the year.

Tsipras' decision to resign and call for early elections in August was a risky move, but it was made out of necessity. His government had lost support from a large sector of the ruling Syriza party, leaving him dependent on the opposition to pass legislation. Holding new elections (the third this year, counting the general elections in January and the referendum in July) was meant to rid Syriza of its rebellious members and to form a more cohesive government that would support the terms of the agreement with Greece's lenders.

Politically, the strategy worked. Syriza lost only a negligible amount of votes when compared to the January election (earning 35.5 percent of the vote compared to 36.3 percent in January). The party created by the rebel lawmakers, Popular Unity, failed to enter parliament. And Tsipras' allies, the Independent Greeks, won enough seats to maintain their alliance with Syriza.

The new iteration of the Tsipras government will therefore be more ideologically cohesive, made more so because this time the prime minister campaigned on a clear promise to respect the terms of the bailout program. Syriza's previous government collapsed partly because of its ambiguous electoral promises, which led to conflict within the different factions of the party. However, this government will also control fewer seats in the parliament. Though Tsipras' first administration had 12 seats more than a majority, it just lost eight of those. This means that Tsipras will have to manage party disputes more cautiously.

Through the end of the year, Athens will have to work with its lenders to reform the Greek banking sector and create the framework to recapitalize the nation's banks. This includes assessing the quality of their loan portfolios and performing stress tests. The Greek bailout included some 25 billion euros (roughly $28 billion) to recapitalize the country's ailing banks this year, but the amount actually made available will depend on the result of the stress tests. Greece's goal is to complete the recapitalization process before 2016, when tougher EU rules on imposing losses on depositors come into effect. Athens will have to deal with this issue while also trying to progressively lift the capital controls that were introduced in June.

Opportunity for Conflict

In the coming weeks, Greece's negotiations with its lenders will focus on two issues: first, the pace of reform and the disbursement of bailout money and, second, debt relief.

Regarding the pace of reform, Greece is operating on a tight schedule, and Athens is unlikely to meet all of its deadlines. This will probably delay the review of Greece's program and, accordingly, the disbursement of bailout funds. This is not an urgent problem, however, since Greece has a relatively calm calendar of debt maturities and can afford to delay some of its bailout disbursements. Greek creditors are also likely to be lenient with Tsipras, considering the notable change in his rhetoric over the past nine months. But there are limits to the creditors' patience, and the governments of countries like Germany, Finland and the Netherlands are ready to resume pressure if Athens fails to make progress on implementing the terms of its bailout by the end of the year.

Now that Tsipras has accepted the terms of the bailout agreement, he will need to put debt relief back on the negotiating table to compensate for the introduction of a new round of austerity measures and to maintain his political support. The creditors are more amenable to the idea of extending Greece's maturities and lowering interest repayments than they were when Tsipras won election in January. However, any delay in the reform schedule will hurt these negotiations, in which case Greece might not receive a concrete offer this year.

In the immediate term, the bailout agreement and the outcome of the latest elections will bring some temporary calm to Greece. Greece has averted a default and, as Stratfor forecast, the country will remain in the eurozone through the end of the year. The newly elected government will use its first weeks in power to pass enough reform to receive additional funds in 2015. The creditors will also be more flexible when dealing with a newly cooperative Athens, hoping to prevent a new political crisis.

But Greece is not out of the woods yet. A demanding bailout program with constant performance reviews will create multiple chances for Athens to clash with its creditors, while the introduction of austerity measures will probably erode popular support for the government, slowing the pace of reform. Moreover, the Greek economy will grow very slowly, reducing the likelihood that Athens will simply grow out of its debt any time soon. Greece's debt will remain unsustainable, and though the threat of a Grexit has been temporarily averted, it has not been completely eliminated.

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