Greece’s Explosive Election Odyssey

Greek stocks up 30% on the MSCI Index through mid-year continued to surge after Prime Minister Tsipras’ snap election maneuver backfired, as his party lost to the conservative opposition which took a parliamentary majority. New government head Mitsotakis follows his father in the post previously, with an Ivy League US education and management consulting background pledging business-friendly policies. His Finance Minister will oversee a corporate tax cut, but warned of “hidden bombs” likely to aggravate the record debt load from hundreds of billions of euros in consecutive EU rescues. Contingent liabilities around state enterprises never restructured or privatized under leftist administration could complicate the 15-year repayment plan agreed with Brussels at concessional rates with a long grace period. It insists in return on maintaining stringent fiscal targets such as a 3.5% of GDP primary surplus, which the incoming Prime Minister campaigned against to boost competitiveness and higher growth than the recent meager 1-2%. Officials from the bailout facility repeated that austerity was a “cornerstone” as other regional struggles over Brexit and migration pre-empt appetite for reopening the Greek saga. A potential ally in softer terms may be ECB governor nominee Lagarde, who advocated outright cancellation as IMF chief, but her immediate priority will be another round of quantitative easing in some form to stoke anemic 1% growth and inflation. With bond-buying and commercial bank on-lending potentially exhausted, she is under pressure to follow the Japanese model into equity holding investors consider a double-edged sword. The new team will look for easy wins like slashing foreign investment bureaucracy and screening that has slowed mining projects, and the cabinet draws on well-credentialed expatriates in the hope of luring back professionals leaving over the past decade’s crisis. Right after the victory, a 7-year bond was heavily oversubscribed with a yield under 2%, as an initial vote of confidence that growth and real returns can outpace neighbors, especially as the “peripheral” story fades in Italy, Portugal and Spain. In core emerging markets the juxtaposition is increasingly with Turkey, where stocks were down 5% in the first half coinciding with the ruling AKP party’s second defeat in the rerun Istanbul major’s race. The fragmented opposition unified around a moderate candidate, as President Erdogan’s grouping has begun to splinter, with the latest defection from his former deputy Babacan. The political as well as economic consequences to loss of the biggest city are far-reaching, as big infrastructure projects and favored business relationships will come under scrutiny and could reveal more serious banking and corporate sector weakness. Around $150 billion in external credit lines must be repaid over the next year after a cumulative 40% lira drop against the dollar since 2018. Depreciation drove inflation above 20%, and quashed import demand also helpful in curbing the current account deficit. The President blamed the poll setback on central bank rate hikes to near 25%, which he claims worsen inflation in contravention of economic orthodoxy.  He sacked the governor and named his deputy as replacement in a fit of pique, and the latter immediately cut the benchmark 4% and pledged more accommodation.  Foreign investors shunned securities in their own swift sanctions on undermining independence, as the US and EU prepared to counter Russian military and Cyprus oil moves with punishm

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