SCENARIOS-Greek election: Impact on markets, economic policyhttp://www.forbes.com/feeds/afx/2009/09/25/afx6931494.html
Current Prime Minister Costas Karamanlis called snap elections for a fresh mandate to pursue bolder reforms to lead the country out of an economic crisis. Whichever party wins will have to deal with a budget deficit topping 6 percent of GDP, the second-highest debt load as a percent of GDP in the euro zone and rising unemployment.
Following are key scenarios on the likely impact on economic policy and the market's reaction under different election outcomes:
PASOK SOCIALISTS WIN OUTRIGHT
Socialists say the economy needs a push to get going again and that fiscal policy should not act as a drag on growth. They promise a 3 billion euro stimulus package for the economy.
A new growth and stability plan will be submitted to the EU Commission as the roadmap to get Greece out of the Excessive Deficit Procedure.
Public sector pay and pensions are likely to get above-inflation raises. Capital gains will be taxed, as will dividends, beyond the current 10 percent witholding tax.
Property taxes changes will burden large real estate holdings. The socialists have said they will not reverse privatisations but seek a better deal with Deutsche Telekom ( DT - news - people ) , which recently bought into OTE Telecom, and on the recently privatised Olympic Airlines.
In view of tough decisions ahead to deal with fiscal challenges and needed reforms, a comfortable PASOK majority in parliament would be a market friendly outcome, despite the less austere tone of the socialists' programme.
The change of guard is unlikely to be greeted with big moves in the yield spread of Greek government bonds over core European benchmark paper -- currently at 120 basis points. With the spread already reflecting a higher country risk, bond investors say they will await the major policy moves -- if those signal fiscal loosening, spreads could widen.
PASOK WINS BUT WITHOUT MAJORITY, SECOND ROUND OF ELECTIONS
PROBABILITY: Medium to High
Prolongation of uncertainty unlikely to please markets given a tough 2010 budget ahead and the fiscal discipline needed to cut the deficit. Bond yield spreads could widen in the short term. But given that a second round at the polls will give the first party bonus seats in parliament, an eventual comfortable majority could turn out to be a market friendly outcome.
CONSERVATIVES SURPRISE WIN, OR STRIKE COALITION DEAL
The conservatives face a seemingly insurmountable task of reversing the tide in less than 2 weeks with political analysts saying their strategy to campaign as fiscal truth tellers will not sell well with voters.
On incomes policy and taxes, conservatives have promised to freeze public sector wages and hirings in 2010, with pay rises thereafter to also take into account euro zone inflation rates.
State divestments set to continue to raise proceeds to pay down public debt. Nickel producer Larco, water utility EYATH, gas monopoly DEPA will seek strategic buyers, with the government likely to pursue stake sales in Athens International Airport, Hellenic Post Bank, Mont Parnes Casino and Thessaloniki Port (OLTH).
No change in corporate tax should be expected but the fight against tax evasion will intensify and many tax exemptions will be reviewed. A new 2-year extension will be sought from Brussels to bring the budget deficit under the 3 percent limit.
If centre-right New Democracy prevails, a knee-jerk reaction could see the yield spread of Greek government bonds over bunds tighten a bit, with the market discounting a tight fiscal stance.