This time next week, Greece could be taking its first step out of the euro zone or preparing to engage the European Union in a nasty debt war, rattling sovereign bond investors throughout the world.
Such are the risks of a victory in the Jan. 25 election by the radical left Syriza party, led by Alexis Tsipras. The charismatic firebrand has used his anti-austerity message, combined with a pledge to write down Greece's apparently crushing debt, to take a small but unwavering lead in the polls. A flurry of recent readings put Syzria about three percentage points ahead of Prime Minister Antonis Samaras's centre-right, pro-austerity New Democracy party. One poll put Syriza's eight percentage points ahead.
Greek voters are apparently fed up with five years of economy-crunching austerity and are willing to gamble that Mr. Tsipras has the audacity and negotiating skills to convince the European Union to dilute Greece's bailout terms.
The vote comes as Greece once again is raising widespread concerns about its economy and finances. Some of the country's big banks have sought emergency liquidity lines from the central bank as a precaution in case funding is needed to backstop recently increasing outflows of deposits.
A grand game of bluff by both political sides is in the offing. But Mr. Tsipras may be more bluster than bite. An EU official involved in Greece's bailout, who did not want to be quoted by name, said: "Why would Germany reward Greece with a debt writeoff?" when Greece has not made good on a number of its austerity and reform promises, from privatizations to civil servant head count reductions.
Greece's debt is now 175 per cent of gross domestic product, the highest in Europe by a long shot (Germany's is just under 75 per cent, a figure the debt-hating Germans themselves consider excessive).
Born in Athens, Mr. Tsipras is only 40. His threats to overhaul Greece's bailout terms have made him one of Europe's best-known politicians; he gained a lot of European-TV face time last year when he ran for president of the European Commission. He studied engineering and urban planning at university and joined the Young Communists Society in the late 1980s. His introduction to elected office came in 2006, when, on the Syriza ticket in the municipal elections, he won a seat on the Athens council. In the 2009 election he went national, joined parliament and became head of the Syriza parliamentary group. In the 2012 election, Syriza nearly upset Mr. Samaras, winning 26.9 per cent of the popular vote to New Democracy's 29.7 per cent.
As Syriza gains popularity, it is moving closer to the political and economic centre. Gone is any suggestion that Syriza wants to yank Greece out of the euro zone and the wider EU. But the anti-austerity message remains intact, as does its desire to hammer down Greece's debt load.
Mr. Tsipras's economic message has undeniable appeal in Greece, where the unemployment rate is 26 per cent and the only industry that show signs of life is tourism. If there is less austerity, and less debt, the government could reopen the social spending spigot. "Austerity is both irrational and destructive," he said the other day. "To pay back debt, a bold restructuring is needed."
Is it? Greece's official debt figure is somewhat misleading. Even the International Monetary Fund (which handed Greece about €32-billion in bailout loans on top of the €195-billion from the EU member states) thinks so.
In its early 2013 review of Greece's financial state, the IMF said the package of interest-rate reductions and debt-maturity extensions awarded to Greece, for fear its economy would entirely collapse, means the headline debt figure "overstates the debt burden." For example, the interest on more than half of the EU portion of the debt is "capitalized" until 2022, meaning the debt payments will only start in that year. Japonica Partners, a U.S. hedge fund that loaded up on Greek bonds, calculated that if the country's debt were valued on a discounted cash flow basis under international accounting standards, its true debt-to-GDP ratio would be a mere 18 per cent.
Still, the debt exists and, at some point way down the road, it will have to be repaid. In spite of the rate reduction and maturity extensions, almost every economist considers the debt "unsustainable," given Greece's weak growth – it emerged from outright depression last year – shattered industries, shrunken wages and, now, euro zone deflation, which makes it impossible to "inflate away" the debt. But Mr. Tsipras won't get his debt deal unless Germany and its pro-austerity allies says so. In an interview Wednesday in the Financial Times, Finnish Prime Minister Alex Stubb said his country would give a "resounding no" to any Greek effort to trim its debt.
If Mr. Stubb's view is shared by Germany and the other northern European creditor countries, Mr. Tsipris will fight a battle that will be exceedingly hard to win. The game of bluff might see him threaten to default on the debt, virtually ensuring Greece's exodus from the euro zone, unless he gets his way. Or it might see Germany threaten to allow Greece to leave if Mr. Tsipris insists on getting his way. A recent article in Germany's Der Spiegel, citing unnamed government sources, said that Ms. Merkel is open to the idea of a Greek exit now that the euro zone has enough built-in crisis protection.
While Greece's exit is unlikely, because both sides have too much to lose, it's not out of the question if Syriza wins Sunday's election. Three years after the height of the crisis, the euro zone is becoming nervous again and about to step into the unknown.