Greece Is Voting Again. Here’s What to Watch

Sotiris Nikas and Paul Tugwell
·3 min read
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(Bloomberg) -- Whether Greece returns to the investment grade zone will be decided in a vote Sunday, with the electorate called to cast their votes for a second time in just over a month.

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Former Prime Minister Kyriakos Mitsotakis seeks to repeat the outcome of May’s vote which this time will most likely secure him a majority in the 300-seat parliament. That’s thanks to a change in the electoral law that gives as many as 50 bonus seats to the leading party.

If he fails to achieve such a win, then the parties will need to form a coalition government. But this scenario again looks impossible because all political leaders have said that they don’t want to work with each other.

Greece is seen growing by more than Europe’s average rate this year, but any political instability could jeopardize the economy’s positive trajectory. A third vote in a row remains a possibility, even if it’s a low-chance outcome.

Here are the main issues to watch:

Polls

All opinion polls indicate that Mitsotakis’s center-right New Democracy party will most likely secure a majority in parliament, even if more parties pass the 3% threshold necessary to enter parliament. Still, the former premier could fall short of 151 seats, or win a little more than this — meaning that his administration won’t be as stable as markets would like.

The leftist Syriza party of ex-prime minister Alexis Tsipras is seen coming second with around 20% of the vote, according to the surveys, while the socialist Pasok party is expected to place third. The Communist party is seen fourth and the far-right Greek Solution would re-enter parliament. The difference with the May result is that this time two more parties - the leftist Freedom Sailing and the far-right, religious driven Niki party - are also seen getting elected leading to a seven-party parliament.

Doomsday Scenario

If Mitsotakis fails to secure a majority and political leaders still refuse to work together, then a third election in about a month from now will be needed.

This would reverse the positive momentum around Greek stocks, bonds and the economy that followed on the May vote. Political instability may return as markets will see that having a new and stable government isn’t as easy as expected.

Economy

The Greek economy is performing well. The European Commission expects a growth rate of 2.5% in 2023, higher than previously seen and above the average. While debt may have risen as an absolute number, it has fallen significantly as a percentage of gross domestic product and is seen dropping further. Greek bonds are trading better than those of other euro-area members who are already part of the investment grade group.

Unemployment is falling, but remains high, while the country still produces a current account deficit, mainly driven by high energy prices. Mitsotakis’s administration had pledged to achieve primary surpluses of 2% of GDP, and even higher in 2023 and in the following years, that will help service debt costs.

Investment Grade

Taking into account the good performance of the economy, rating companies are ready to award Greece with investment status that was lost 13 years ago when the country’s financial bailouts began.

The political risk now seems to be the main obstacle to such a decision. Markets, analysts and rating firms want a stable government that has a strong majority in parliament, so that Greece can continue pro-business reforms and the fiscal path already embarked on.

Fitch Ratings recently affirmed Greece’s rating and outlook, which is just a notch below the rating company’s investment grade zone. S&P Global Ratings and DBRS Morningstar also have Greece one notch under investment grade, while Moody’s has the country three steps away from the much-wanted rating.

--With assistance from Vassilis Karamanis.

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