Fears of a dramatic escalation of the eurozone’s long-running crisis eased last night following the election in Greece of a pro-euro party and fresh momentum from G20 nations towards boosting the IMF’s war chest.
The wafer-thin victory of Greece’s centre-right New Democracy party over radical leftist Syriza in yesterday’s poll indicated that the Greeks had stepped back from the brink of a euro exit and was seen as bolstering efforts by European leaders to put a floor under the eurozone crisis.
With almost all votes counted last night, projections issued by the interior ministry put New Democracy on 29.7% of the vote (129 seats), Syriza on 26.9% (71) and the socialist Pasok party on 12.3% (33).
New Democracy’s leader Antonis Samaras hailed the result as “a victory for Europe” and markets were expected to rally on hopes that Greece would not now be forced to leave the single currency.
But analysts were quick to point out that the strong showing by the Syriza, which campaigned on a manifesto to renegotiate the $170 billion bailout by Europe and the IMF, meant that there could be fresh upsets.
“The multi act Greek tragedy continues to play out, and despite the election outcome, the drama is nowhere near complete,” said Kim Rupert, an economist at analysts Action Economics.
“The enormity of the problems and worldwide scope of the issues will take months, if not years to resolve. So hold on to your hats as the fallout from the election should keep the markets on a wild ride.”
Nouriel Roubini, the economist who foresaw the crisis and has been a vociferous critics of policymakers’ response, said Greece was a “side show”. “Italy and Spain may lose market access and need a rescue by the Troika [of the EU, ECB and IMF] regardless of Greek elections as Spain bank rescue [was] botched,” he tweeted.
The outcome of the Greek election has been keenly awaited by G20 leaders gathering in Los Cabos and many breathed a sigh of relief at the Greek result.
The White House issued a statement urging Greek leaders to form a coalition in time to stave off further economic turmoil. “We hope this election will lead quickly to the formation of a new government that can make timely progress on the economic challenges facing the Greek people,” press secretary Jay Carney said in a statement.
German Finance Minister Wolfgang Schäuble said the German government would treat the election result as a decision by Greek voters to “forge ahead with the implementation of far-reaching economic and fiscal reforms in the country”. “This path will be neither short nor easy but is necessary and will give the Greek people the prospect of a better future,” he said.
In outspoken comments before the election results outgoing World Bank president Robert Zoellick had warned that Europe was running the risk of sparking a Lehman-style global crisis. “Europe may be able to muddle through but the risk is rising,” he said. “There could be a Lehmans moment if things are not properly handled.”
Holger Schmieding, chief economist at the German bank Berenberg and a former adviser to the IMF, said a coalition between New Democracy (ND) and Pasok would be a “relief” as it would reduce the risk of a Greek exit.
He believed Germany would now put aside doubts about Greece and agree to give it more time to meet fiscal targets, while the country would benefit from the growth initiative to be passed at the European Council summit on 28 and 29 June.
“If it shifts its emphasis from fiscal austerity to deregulation and other supply-side reforms, the Greek austerity and reform programme could finally work,” he said. “With an ND-Pasok coalition, Greece would have a 75% chance of still being in the euro by the end of 2012.”
The optimistic mood was buoyed by growing expectations that the G20 would on Tuesday unveil a greater than expected increase to the IMF’s firepower beyond the $430 billion promised in April.
G20 summit host Felipe Calderon told reporters in Los Cabos: “I estimate that there will be a larger capitalization than the pre-accord reached in Washington, which will be finalized here, but I don’t want to speculate by how much.”
The decision is likely to be seen by markets as a sign that the world’s leading nations are prepared to provide the firepower to kill the threat of euro contagion.
“This is not a trivial sum,” said Andrew Kenningham, an analyst at Capital Economics, who said the agreement would double the Fund’s usable resources to around $800bn (€650bn).
“However, it would not be enough to finance bail-outs for both Spain and Italy unless the IMF were willing to shoulder a much larger share of the burden than it has in previous bail-outs – something which the IMF’s key shareholders would not sanction,” he said. “What’s more, it is clear that the euro-zone crisis cannot be resolved by bail-outs alone, however large the sums involved.”
Calderon confirmed that the United States would not be taking part and the contribution of the key BRICS economies of Brazil, Russia, India and China, is still unknown.
Brazil has sought to link the refinancing with the agreement to boost the voting power of emerging markets on the IMF, which has still not been approved by enough members two years after it was agreed.
Japan, which was one of the strongest supporters of the IMF recapitalization with a $60 billion pledge, warned that it wanted to see greater voting powers going to countries that had taken part in the refinancing in the next round of IMF voting reform.
Japan’s vice finance minister for international affairs Takehiko Nakao said he believed voting reform should “take into consideration” countries contributions.
“We are starting discussions about the quota formula and when we think about this our idea is that the quota allocation should take into consideration the contribution to the IMF including this kind of lending,” he told Emerging Markets.
Meanwhile a victory for France’s ruling Socialist party, which last night won an absolute majority in parliament, cemented a growing sense of optimism following a weekend of high drama that many had feared was make or break for Europe.