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MACROECONOMICS

Could the Greek Government Collapse this Weekend?

Could, Greek Government, Collapse, this Weekend, Greek Prime Minister, Tsipras, Syriza, Macroeconomics, fx trader, forex

31 Jul 2015

The capitulation of Greek Prime Minister Tsipras to the demands of the official creditors has split the Syriza coalition. About a quarter of the party refused to make the apparent U-turn with the Prime Minister. Those that were part of the cabinet have been replaced. However, they retain their seats in parliament, and apparently obstructing the government's efforts. 

At meeting with Syriza's central committee, Tsipras was obviously frustrated. The rebellion by the faction that we have likened to the fundis in the German Green Party, more principled than pragmatic, is yet another stumbling block in negotiations with the official creditors.

Tsipras had wanted to wait until after the negotiations for a third aid package were complete but effectively leading a minority government undermines Tsipras' negotiating authority. He had initially offered a party congress in September. However, this did not seem to appease his critics within Syriza, and he has proposed a vote within the party; a referendum, if you will, on the 86 bln euro assistance program being negotiated. If Tsipras losses the vote, snap election would seem inevitable. That said, Italy has changed prime ministers three times without a national election.

An estimated 40% of the Syriza's central committee (roughly 80 of 200 members) does not support Tsipras' concessions to the creditors. A significant number think that Greece should exit EMU and bring back the drachma. Tsipras argues, as we have, that as bad as the EMU might be, it would be worse outside of it.  A deeper recession, higher unemployment, destruction of the banking system, and a larger drop in living standards would be the likely result. It does not have the export capacity or economic structure to reap the benefits that are often thought to come from a weaker currency.  

Syriza's central committee is expected to make a decision whether to accept the fait accompli that Tsipras and his realos allies have given the fundis. Ironically if Tsipras' course is rejected, and national elections are held, Tsipras may return. He is currently the most popular politician in Greece and more popular it seems that the Syriza Party itself. In addition, the two main tradition parties are in transition themselves. The Socialists (PASOK) have just elected a new leader, and the center-right New Democracy is in the middle of a leadership contest.

Solidifying his flanks and bringing the fundis to heel become even more important. Press reports indicate that the IMF's staff has told the board that Greece's high debt levels and weak track record of implementing reforms disqualifies it from future assistance. This should be understood as a recommendation and not the declaration of policy. That is a prerogative of the shareholders.

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