Greece's Political Crisis Might Force It Out Of The Euro

With Greece just three weeks away from the general election on Jan. 25, called after the country's politicians failed to elect a president at the end of December, Athens is firmly back in Europe's spotlight along with a serious discussion about whether Greece will remain in the euro.

That's because Syriza, the radical leftist coalition that wants to tear up the country's bailout rules, looks likely to win. That means a game of chicken with the EU institutions and International Monetary Fund. If either side refuses to back down, there could be market chaos, bank runs, and a forced exit from the euro. 

Syriza have opened up a solid polling lead. Here's a chart from Oxford Economics: 

Oxford Economics

It's not Syriza's official policy to leave the euro, but a solid portion of the group are happy that route, and others may join them - if pushed.

German politicians are lining up to issue stern warnings to Greece that it won't allow any further easing or assistance for struggling countries on Europe's periphery. So far Michael Fuchs, a senior parliamentarian, and Wolfgang Schaeuble, finance minister, have both cautioned against any deviation from the current austerity and reform plans. 

These are the same politicians that mouthed off in 2012, and were more content with letting Greece exit then. For now, the issue hasn't spread beyond the usual suspects in German politics. There are three major reasons that could change, and Germany might become less bothered by Grexit this time round:

1. It might become a media and political issue. Angela Merkel's party has already lost some support to Alternative fur Deutschland, Germany's anti-euro party. Since the European Central Bank is likely to bring in quantitative easing early this year (which many Germans also see as a sort of bailout of the south), the Greek issue may get a lot of attention. That would put Chancellor Angela Merkel under more pressure to oppose more concessions.
2. Greece may no longer be a systemic risk for the eurozone. During the euro crisis, Greece looked like the only country which might imminently leave the eurozone, but that crisis sent the cost of borrowing for countries like Spain, Italy and Portugal soaring too. There seemed to be a risk of contagion: If Greece left, why not other countries? This time, while Greek bond yields have risen but the other countries haven't. That might be taken as a signal that it's safe to be tough with Syriza without putting other countries in danger.
3. They don't want to set an example. If Syriza get some of the debt reduction that they want, Morgan Stanley analysts suggest "Greece would become more like Portugal, with a similar debt stock, although better composition." That's great for Athens, but it's not clear why Lisbon would be happy. Such a move would embolden every anti-austerity party in the continent to make their own demands.

So if Syriza got elected, what might the months afterwards look like? Here's Morgan Stanley's timeline:

Morgan Stanley

Those Eurogroup meetings in January and February, which bring together the finance ministers of the eurozone, would be crucial for testing the water. There would undoubtedly be discussions and public statements to indicate the position of different governments towards Syriza and Greece.

Greece also has big bond payments due in July and August, and Syriza have expressed no intention of sticking to the country's current austerity plan. Assuming that Syriza can form a government, the events running up to this, and hints from other European countries and institutions will be crucial.

There's a huge amount of uncertainty here, because a country has never left the euro before. It's not clear what happens when a country's government just refuses to co-operate.

Here's how Twitter's Dan Davies thinks a Grexit timeline could play out

Most analysts still think Grexit seems unlikely and have a pretty optimistic view about Syriza becoming much more moderate and co-operative if they form the government, and suggest that European institutions will offer some relief. But that depends on both sides softening their current stances, something that's not at all certain to happen.