Syriza won, so what's next for Greece?

Written By limadu on Senin, 26 Januari 2015 | 23.10

LONDON (CNNMoney)

The result sets the stage for a mighty battle between Greece and its international lenders. Leader Alexis Tsipras will be sworn in as prime minister on Monday, after moving quickly to form a coalition with the Independent Greeks party. The parties want tough bailout terms to be eased, while the country's backers remain reluctant to forgive much of its heavy debt burden or weaken their hardline stance on structural economic reforms.

The result has sent a charge of worry through Europe. Suddenly Greek risk -- including a possible exit from the euro -- has begun to simmer again.

So what's next for Greece, and for Europe?

1) Banking jitters: Already money is flowing out, and there's not as much coming in. Syriza's pledge to relieve the tax burden has deterred some citizens from paying their taxes, and receipts could be much lower if the new leaders honor their election promises. Capital flight has increased. Investors are nervous, with bank stocks down as much as 11% in Monday trading. The Greek banking sector is more robust than it was before the financial crisis, but two major banks have applied for emergency liquidity support from the European Central Bank should conditions deteriorate.

Related: Has 5 years of austerity paid off?

2) Debt extension: The first big challenge for Greece's new government is to secure an extension to its current bailout. The clock is ticking: The deadline is February 28. Capital Economics chief European economist Jonathan Loynes said the government faces heavy debt redemptions this year, and will run out of money quickly without support. The International Monetary Fund puts Greece's net debt at about 170% of GDP.

3) Restructure debt: Here's where the battle really begins. Greece's new guard wants austerity measures such as tax hikes and government spending cuts to be revised. But the country's international lenders -- the IMF, the ECB and the European Commission -- are unlikely to soften their debt terms without major concessions.

Greece accepted its first bailout in 2010. Since then it has received €240 billion ($277.8 billion) in emergency loans. The high-stakes negotiations will hinge on hardline parties from both sides -- in particular Germany -- giving up ground. German taxpayers fear they'll be forced to bear the brunt of the losses if Greek debt is forgiven.

Related: Europe plays it tough with new Greek leaders

Strategists at HSBC said "outright haircuts" are unlikely, but some easing of austerity and primary surplus targets could be agreed. Syriza has also said it wants to reverse many of the structural reforms -- reforms its lenders see as central to lift economic growth. Last year, the country returned to modest growth after five years of recession -- but output remains far below levels seen in 2007.

4) Possible Grexit?: Drawn-out negotiations could prove dangerous for Greece. Low on funds, it needs to act relatively quickly. Experts say Greece's exit from the eurozone isn't an immediate threat, but one that could materialize.

Capital Economics' Loynes said the Grexit risk "could rise if a prolonged stalemate between Syriza and [lenders] prompts renewed market pressures and weakens Greece's already fragile banking system."

Still, the impact on the wider region is likely to be much reduced from that seen during waves of panic in recent years thanks to new funding support mechanisms, and stronger European economies. Also helping matters is support of the currency bloc—just over two-thirds of Greeks want to stay in the euro.

First Published: January 26, 2015: 9:31 AM ET


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