Greece Is Voting Again. Here’s What to Watch

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(Bloomberg) — Whether Greece returns to investment-grade territory will be decided in Sunday’s vote, with voters called to cast ballots for the second time in just a month.

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Former Prime Minister Kyriakos Mitsotakis is seeking a repeat of May’s vote, which this time is likely to secure him a majority in the 300-seat parliament. This is thanks to a change in electoral law that gives up to 50 more seats to the leading party.

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If he fails to secure this victory, the parties will need to form a coalition government. But this scenario again seems impossible because all the political leaders have said they don’t want to work with each other.

Greece is seen growing at more than the average rate in Europe this year, but any political instability could jeopardize the positive trajectory of the economy. A third consecutive vote is still a possibility, even if it is a low chance result.

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Here are the main issues to watch:

Polls

All polls indicate that Mitsotakis’ New Democracy party will likely secure a majority in parliament, even if more parties cross the 3% threshold needed to enter parliament. However, the former prime minister may not reach 151 seats, or win a little more than that – meaning his administration will not be as stable as the markets would like.

According to the polls, the left-wing Syriza party of former Prime Minister Alexis Tsipras comes in second with about 20% of the vote, while the socialist PASOK party is expected to come in third. The Communist Party is seen in fourth place and the far-right Greek solution will return to Parliament. The difference with the May result is that this time two more parties – the left-wing Freedom Sailing and the far-right Niki party – are elected resulting in a seven-party parliament.

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Doomsday scenario

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

This will reverse the positive momentum around Greek stocks and bonds and the economy that followed the May vote. Political instability may return as the markets will see that having a new and stable government is not as easy as expected.

Economy

The Greek economy is doing well. The European Commission expects a growth rate of 2.5% in 2023, higher than previously and above average. While debt may have gone up as an absolute number, it has fallen significantly as a percentage of GDP, and is expected to fall further. Greek bonds are trading better than those of other eurozone members that are already part of the investment grade group.

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Unemployment rates are falling, but still high, while the country is still producing a current account deficit, mainly driven by higher energy prices. The Mitsotakis administration has pledged primary surpluses of 2% of GDP, and even higher in 2023 and in the following years, which will help service debt costs.

investment grade

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

It now appears that political danger is the main obstacle to such a decision. Markets, analysts and ratings firms want a stable government with a strong majority in Parliament, so that Greece can continue the pro-business and fiscal reforms that have already begun.

Fitch Ratings recently affirmed Greece’s rating and outlook, which are just below the rating company’s investment rating territory. S&P Global Ratings and DBRS Morningstar also have Greece one notch under the investment rating, while Moody’s has the country three steps away from the highly sought after rating.

– With assistance from Vassilis Karamanis.

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