Living with Syriza

Greek debt looks fine despite Syriza poll dangers

Syriza victory or flop, Greek debt looks cheap. The parliamentary election on January 25 may put the left-wing coalition in charge of government. Its agenda for debt relief and the end of austerity puts Greece on a collision course with its euro zone lenders. But neither side has interest in a messy "Grexit," and the risks of the mess are fairly priced.

The leftist movement's platform presents many problems for the euro zone. Syriza says it wants a haircut on its bailout loans, which northern Europe countries see as verboten fiscal transfer. It opposes the neo-liberal market reforms that underpin the adjustment programme. Furthermore, whatever concessions Greece gets might embolden other left-wing parties across Europe.

The conflict seems intractable, yet a compromise is possible. Syriza could conceivably threaten to take Greece out of the euro, although it says it won't. But Greek voters want to stay in the monetary union, and an exit would be too devastating for Greece's economy. Devaluation might help exports and tourism, but only so much: the brutal collapse in wages from Greece's "adjustment" hasn't made it much more competitive, given its rigid economy and high taxes. As for Greece's partners, even if they think the euro zone would survive Grexit, they also know it would suddenly look more fragile.

There are signs that a drama can be avoided. Syriza's tone has moderated in recent months. Its leader Alexis Tsipras has spoken of maintaining a primary fiscal surplus, and encouraging foreign investment. With help, he may even appreciate the subtle difference between a debt haircut, and maturity extension coupled with an interest cut. Some of Syriza's tax policies may be fairer and better for growth than the uneven austerity imposed by Greece's bailout.

History is littered with avoidable mistakes. Greece could make one, if negotiations break down, the ECB cuts off funding to banks, or endless stalemate sinks the economy further. For bondholders the main risk is a disorderly exit, since a negotiated restructuring would likely exclude the small amount of still-privately held bonds. Greece's three-year bonds are yielding about 10 percentage points, and pricing in more than a 15 per cent probability of default over one year. The odds look fair.