Alexis Tsipras
Photograph by Ayhan Mehmet —Anadolu Agency/Getty Images
By Geoffrey Smith
January 26, 2015

Greece’s new Prime Minister Alexis Tsipras has gone for the confrontational option in choosing a coalition partner after his Syriza party fell just short of winning an outright majority at Sunday’s snap elections.

Syriza announced Monday that it would form a coalition with the Independent Greeks, a right-wing party with which it has little in common except a visceral loathing for the terms of Greece’s bailout and a demand that a large part of Greece’s debts to the Eurozone and International Monetary Fund are written off.

It’s a move that will all-but guarantee a majority in parliament if Tsipras decides to renege on the bailout and, if need be, quit the Eurozone, but one that offers little chance of coherent government if he falls into line with the more usual European tradition of consensus-driven politics.

With almost all votes now counted, Syriza is set to get 149 seats in the 300-seat parliament. The Independent Greeks, the smallest of the seven parties to get over the 3% threshold for representation, will get 13.

Tsipras opted for the Independent Greeks rather than the centrist To Potami (The River) party, which got 17 seats, because the latter had said it wouldn’t support any actions that led to Greece leaving the Eurozone. That would have undermined Syriza’s biggest–some say its only– leverage in negotiations with its creditors, in as much as it is willing to gamble that the rest of Europe is more scared about the consequences of a Eurozone breakup than about giving Greece some debt relief.

Those negotiations are due to kick off later Monday, when the college of Eurozone finance ministers (known as the Eurogroup) meets in Brussels.

If the past is any guide, then today’s meeting will start a game of brinkmanship that is only likely to be resolved when Greece is on the verge of running out of money. That can be defined a number of ways. The government will run out of money by March, says Manulife Asset Management chief economist Megan Greene.

There has been no indication from any of the creditors that they’re willing to write off any Greek debt yet. But Greene says there is still plenty of room for them to cut the interest rate on the outstanding loans, and to stretch the repayment schedule out for much longer, without losing face. The question is whether that will be enough to satisfy the new Greek government.

The other variable is what happens to Greece’s banks while that game of chicken is being played out. Recent reports out of Greece suggest that over €8 billion in deposits has flowed out of the banking system since December, almost 5% of the total. Those outflows will only accelerate if the talks go down to the wire.

The last time that happened, the European Central Bank stepped in with tens of billions of euros of “Emergency Lending Assistance” to stop Greek banks collapsing. Reports suggested that banks are again requesting ELA, but there has been no confirmation yet.

That means that the ECB is again going to be in the hot-seat, forced to take the intensely political decision of whether or not to keep lending to Greece’s banks even while the country’s governments threaten to leave the Eurozone, a move that would likely bankrupt a Greek financial system which has barely recovered from five years of crisis.

ECB officials are already pleading for common sense to prevail. Board member Benoit Coeuré told Europe 1 radio that Europe has a responsibility to “adapt to a change in government, even a radical one,” but he also warned Tsipras against pushing too hard for debt relief.

“He has to pay, those are the European rules of the game,” Coeuré said. “There is no room for unilateral action in Europe, (but) that doesn’t exclude a discussion, for example, on rescheduling.”

Either way, the ECB is not going to be buying Greek government bonds through its quantitative easing program until July, when the talks over the fate of Greece’s debts should be resolved.

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