On the evening of Aug. 20, 2015, Greek Prime Minister Alexis Tsipras resigned and called for new elections. Although the timing of the announcement was somewhat unexpected, the proposition of new elections was not. FSG believes that this does little to fundamentally change prospects of Greek economic recovery or materially alter the stability of Europe and the euro.

On the surface, Tsipras’ resignation is intended to strengthen his party and thus his mandate for reform. Greece finalized its €86 billion bailout deal on Aug. 14, the first disbursement of which was used to repay €3.2 billion to the ECB on Aug. 20. As the parliament passed the reforms required for bailout, the SYRIZA party majority was broken by defections from far-left MPs opposed to the bailout itself.

In the wake of the votes, 25 former SYRIZA MPs, led by former Energy Minister Panayiotis Lafazanis, left Syriza and formed “Popular Unity,” now the country’s third largest party.

Why now?

New elections were expected once Greece’s bailout was secured. However, it is surprising that elections are being called before October, when the IMF was set to review Greece’s progress towards reform and re-evaluate whether it will take part in subsequent bailout funding. Had the same minority government stayed in power through October to implement the reform packages, it might have had a better chance of securing a positive assessment of reform progress that would lead to debt relief and new IMF loans.

On the other hand, there are domestic political advantages to holding the vote sooner, namely Tsipras’ preference for controlling the country’s political narrative.

Heading into elections, polls estimate that Tsipras’ personal popularity is as high as 61 percent, and that SYRIZA has support of perhaps 34 percent, suggesting popular approval of the party’s hard negotiation with creditors.

If this support persists, Tsipras will do well in September elections, especially because Popular Unity will have little time to mount a viable challenge. Similarly, because many of the reforms passed in July will carry heavy tax burdens that will be felt only in October, September elections may offer the opportunity to win votes ahead of the likely backlash.

If elected with a new mandate for reform, the hope is that Tsipras will be able to negotiate a viable debt relief package with creditors and pass necessary additional reforms early in his new term.

What’s next?

Before elections are held, the second and third largest parties, New Democracy (ND) and Popular Unity, each have up to three days to attempt to form a government. On Monday, Aug. 24, ND admitted its inability to form a coalition, after using the full three days. Popular Unity will do the same in order to delay the vote and raise their public profile. When they, too, prove unable to form a government, the president will schedule elections to occur within 30 days. Although initial reports named Sept. 20 as the date for a new vote, given these delays, Sept. 27 (or even Oct. 4) is more likely.

Until new polls in early September, it will be difficult to assess how the electoral landscape has shifted as a result of Popular Unity’s emergence. However, the most likely outcome is that Tsipras and SYRIZA will remain in power, probably at the head of a somewhat more center-left coalition. Greeks remain supportive of the bailout and are fearful of leaving the euro, a threat that Tsipras will channel for his campaign.

Until the vote, the head of the Supreme Court, Vassiliki Thanou-Christophilou, will lead a caretaker government. Given her opposition to the bailout, and the lack of any government mandate, it’s highly unlikely that substantial implementation of reforms will occur before the new elections and, thus, the IMF’s October review schedule. Early movement towards privatization already ground to a halt during the week of the announcement.

The Eurogroup has highlighted that new elections do not affect the bailout agreement and should provide a stronger mandate for reform. However, lack of implementation will delay IMF participation in the bailout, and postponing the October review will push back any possible agreement on debt forgiveness.

In the long run, another month’s delay in this multi-year tragedy is minimal, but every day of uncertainty further erodes Greece’s already slim chances of rapid economic recovery. As a result, the Greek economy will continue to struggle towards recovery, while the rest of the eurozone faces a slow – but muddling along – recovery.

Signposts to watch:

While this process will have minimal effect on the euro and is unlikely to return the country to the brink of Grexit, there are a few outside scenarios worth monitoring:

• Waning SYRIZA popularity: Tsipras’ popularity has proven surprisingly resilient during the last few months of crisis. Should it evaporate, or should Popular Unity prove far stronger than expected, anticipate major political volatility. FSG will be watching this threat closely
• Debt relief: Debt restructuring in October is unlikely without substantial implementation of reforms. Still, after months of negotiation, representatives from creditor institutions would certainly prefer to see Tsipras remain in power given their vastly-improved relationship and his promises of reform. Opportunistic major announcements about debt relief or conditionality are unlikely, but they could play a role in the election.

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(Image: Michael Kappeler/Corbis)