The Greek crisis is back. The question is how much it matters this time around.
Markets are certainly taking notice – the euro tumbled yesterday to a nine-year low and stocks were sideswiped – but the differences between now and then are vast.
"Grexit," the ugly little word for a Greek exit from the euro zone, is suddenly back in the news and rattling investors as the country's leftist, anti-austerity Syriza party tops the polls in the run-up to a Jan. 25 election.
In mid-2012, the prospect of a Syriza victory triggered a run on banks and sent shock waves across Europe. Greece was about to leave the currency union, and if it bolted, Spain, Portugal and Italy might not be far behind.
Indeed, every development in the Greek debt crisis seemed to ripple through the markets.
Now, however, a Greek exit would certainly hurt the 19-country euro zone, but not to the extent it would have two or three years ago.
The region is out of recession, and most of its big banks have been recapitalized and have survived the European Central Bank's stress tests. A permanent bailout fund is in place, and two of the three countries that resorted to rescues, Ireland and Portugal, have exited their bailout programs.
The pro-austerity, pro-bailout New Democracy party of Prime Minister Antonis Samaras won the 2012 election by a bare margin.
Syriza, led by Alexis Tsipras, who is 40 and leader of the Opposition, no longer wants to yank Greece from the euro zone and recently blunted some of the sharpest edges of his economic policies as his party moves into the mainstream.
But he still wants to dilute the austerity programs imposed by the so-called troika – the European Union, the ECB and the International Monetary Fund – and restructure Greece's debt. In a speech on Jan. 3, he called austerity "unreasonable and catastrophic" and urged a "writedown on most of the nominal value of debt, so it becomes sustainable … That's what was done for Germany in 1953. It should be done for Greece in 2015."
Mr. Tsipras may be bluffing when he pledges to end austerity and crunch the debt, just as German Chancellor Angela Merkel may have been bluffing when she reportedly sent out the signal that she is willing to accept a Greek exit if Syriza wins. Her message, later partly denied, was carried Saturday in report that cited unnamed sources in the German magazine Der Spiegel.
While it may be different this time, the troika nonetheless fears that a Greek departure would encourage me-too exits, or debt restructurings, in the weakest countries.
In Italy, which is in recession for the third time since 2008, each of the main opposition parties wants to yank Italy out of the euro zone. In Spain, the most popular party is Podemos, which came out of nowhere a year ago and, like Syriza, preaches an end to austerity and a debt writedown.
At the same time, Greek bond yields have climbed back to crisis levels. In the past month, the yield has shot up almost 1.9 percentage points, taking it to just under 9 per cent. In 2010, Greece sued for a bailout when the yield surpassed 7 per cent, as did Ireland and Portugal. But the bond yields of other euro zone countries have not climbed, suggesting a new Greek crisis could be contained.
There is no doubt that Greece's debt is unsustainable. In 2014, it was estimated by the European Commission at 175 per cent of gross domestic product, the second highest in the world, after Japan.
While Greece is finally out of recession, the country is not generating enough growth to bring down the relative debt quickly. Unemployment, at 27 per cent, remains firmly in crisis territory. And Even though the interest on Greece's debt is very low, and much of the debt has seen its maturities extended, the debt payments leave the government with virtually no room for investment and job-creation efforts.
But a massive debt writeoff would destroy the Greek banks, wreck the supply chains for everything from food to fuel, and probably result in mass, violent protests. A former ECB official who knows Greece well, but did not want to be identified, said Mr. Tsipras is well aware that a debt default would wreak economic havoc and destroy his government.
"He knows that the only way he can survive is to do a U-turn on his economic policies," he said, suggesting that Mr. Tripras may have to settle for a relatively insignificant debt maturity extension.
Even though it has a slight lead in the polls, there is no assurance that Syriza will win. Mr. Samaras's New Democracy came back from almost sure defeat in the run-off election in 2012 – the first one that year proved inconclusive – and could do so again. The fairly tight polls suggest a messy coalition government that might be incapable of pushing forward any radical economic program.
But investors and the troika will remain on edge as the possibility of "Grexit," however remote, returns.
Eric Reguly