Peter Spiegel

Fears of 'Grexit' are overblown

Greece, despite its troubles, is nearly self-sufficient. It has run a primary Budget surplus for more than a year. -- PHOTO: REUTERS
Greece, despite its troubles, is nearly self-sufficient. It has run a primary Budget surplus for more than a year. -- PHOTO: REUTERS

The last time Mr Alexis Tsipras came this close to power, you could almost smell the panic.

The leftist firebrand emerged from nowhere to come within a hair's breadth of unseating Greece's two mainstream parties in national elections three years ago by repudiating Athens' €172 billion (S$273 billion) European Union-led bailout. Without the rescue funding, Greece would have defaulted on its national debt. A bank run was accelerating. An implosion of the euro zone and a global economic catastrophe loomed.

So after an inconclusive first election in June 2012, EU leaders engaged in a bit of fear-mongering - justified by the fact that their fear was real. Vote for one of Greece's two mainstream parties in a second election, Greek voters were told, or "Grexit" and Armageddon would follow. "What alternative did we have?" recalled one senior European leader involved in the campaign.

With Mr Tsipras' Syriza party leading in opinion polls ahead of snap parliamentary elections on Jan 25, the fear campaign has ratcheted up again. Political allies of Dr Angela Merkel, the German Chancellor, have warned they are prepared to let Greece leave the euro zone (just as German ministers did in 2012). Mr Pierre Moscovici, the EU's economic chief, has implied Syriza's economic plan is "suicidal". Grexit is again on everyone's lips.

But privately, European officials acknowledge 2015 is not 2012. Nobody really believes Grexit is imminent. The European Central Bank is poised to launch a big round of sovereign bond buying. Commercial banks have been recapitalised. And Greece, despite its troubles, is nearly self-sufficient. It has run a primary Budget surplus (before interest payments) for more than a year. It returned to the private capital markets last year and its economy started to grow after six years of recession.

The fear-mongering this time is based on a different fear: that Mr Tsipras may usher in months of political uncertainty, highlighting to markets that the euro zone is still weighed down by high debt, weak growth and political instability despite five years of efforts to clean up the mess.

At the core of his economic platform is debt relief, an idea so unthinkable that nearly every mainstream economist has advocated it. In November 2012, euro zone finance ministers actually committed to granting Athens additional debt relief once it ran a primary surplus - a promise unfulfilled for more than a year.

How radical is Mr Tsipras' idea of a Paris Club-style debt restructuring? So radical that, according to three officials involved in the discussions, euro zone officials actively considered such a plan in late 2012. The French-led initiative would have seen Greece's debt obligations cut in tranches - much the same way bailout aid is granted - after meeting a series of economic reform commitments.

Officials who have met Mr Tsipras since the 2012 polls relate how reasonable he is in person. Most think he realises he can govern only from the centre, even if a third of his party are Marxist radicals. He will probably have to find coalition partners, which gives him an excuse to moderate, they say. Some even hope he could become Greece's Luiz Inacio Lula da Silva, the radical labour leader who became Brazil's most important reforming president.

Mr Tsipras presents EU leaders with a political problem, not an economic one. Can they strike a deal with a man who has threatened to abandon reform commitments? Could someone who once advocated overthrowing the system stick to a grand bargain that lowers Greece's national debt to more sustainable levels? And wouldn't cutting a deal with Syriza only embolden other radical parties?

Greece under Mr Tsipras means political uncertainty. But, like the markets, most European officials appear to have priced in a Tsipras victory. The challenge is no longer the euro zone's survival, but the bread and butter of everyday politics: finding a mutually acceptable compromise.