Cecilia Hermansson, Chief Economist at Swedbank, about Post-election Greece.

1. Swedbank Analysis No. 6  18 June 2012
Post-election Greece: 10 questions and answers
 Although New Democracy has won the Greek
election by a slight majority, there is still considerable
uncertainty how a government will be formed. New
Democracy and Pasok together would have a
majority, but it is unclear how the reform package will
be implemented considering that these parties didn't
previously take ownership of it.
 Signals that the euro countries are willing to ease the
reform package should be seen largely as a symbolic
gesture to improve negotiations with the new
government and strike a softer balance between
austerity and growth. For the most part, the package
remains unchanged, though the timetable to meet the
terms could be expanded. It would be positive if the
deadline to decide on 11 billion euros in cutbacks
were delayed slightly.
 Initially positive market reactions are a sign of relief
that Syriza didn’t win the election, which would have
increased the risk of a Greek default and exit from
the euro cooperation. Given the uncertainty still
swirling around the government, the fact that
parliament is in no position to decide on cutbacks
and that a payment default still can’t be ruled out,
market concerns are likely to increase once again.
There is also a risk that the government won’t last
and a new election will have to be called after the
summer. Even if Greece manages to reverse its
slide, it will take years to turn the economy around.
Economic Research Department, Swedbank AB (publ), SE-105 34 Stockholm, tel +46 (0)8-5859 7740
e-mail: ek.sekr@swedbank.com Internet: www.swedbank.com Responsible publisher: Cecilia Hermansson +46 (0)8-5859 7720.
Magnus Alvesson +46 (0)8-5859 3341, Jörgen Kennemar +46 (0)8-5859 7730 ISSN 1103-4897

2. Question 1: What do the election results
show?
New Democracy has won the Greek election by a slight margin. New Democracy has
With practically all the votes counted (99.86%), it took 129 seats won, but what the
in parliament, with the leftist coalition Syriza winning 71 and government will look
Pasok 33. Syriza’s leader, Alexis Tsipras, has congratulated his like is unclear
New Democracy counterpart, Antonis Samaras, on the victory.
In all likelihood, Samaras will be named the new prime minister
of a coalition government, though there is still considerable
uncertainty how a government will be formed.
According to Greek law, the party that wins the most votes
receives an additional 50 seats in parliament, so the difference
between New Democracy and Syriza was actually much
smaller, 29.7% vs. 26.9%, or 79 seats vs. 71 seats without the
extra 50. Pasok received 12.3% of the votes, down from the
May election. The extreme right Golden Dawn party received
about the same share of votes as the May 6 election, 6.9%, and
18 seats. This gives it a place in parliament and underscores a
widespread displeasure with the established parties.
The young – many urban and without work – voted more for the
leftist alternative, Syriza, while more older and wealthier voters
chose the New Democracy center-right alternative. It's worth
noting that a majority of the population didn’t vote for either of
the two parties that are expected to form a government.
Question 2: What do the results mean for
Greece?
It is unclear how the government will turn out. New Democracy New Democracy and
didn’t receive a majority and has to form a coalition. Pasok Pasok may eventually
announced early on that unless Syriza was part of the govern, but haven’t
government it wouldn’t join, but Syriza prefers to be in previously taken
opposition (with the possibility of gaining greater support if the responsibility for the
new government fails). reform process
If New Democracy manages to persuade Pasok, the traditional
parties will have a majority and regain power (162 of 300 seats
in parliament). These two parties have signed the loan
agreement with the so-called troika (the IMF, EU Commission
and European Central Bank, ECB). While they intend to fight for
less onerous terms, there has been no mention of tearing up
the entire package as with Syriza. This increases the likelihood
that Greece will accept austerity and remain in the euro zone.
Pasok and New Democracy haven't previously shown a
willingness to comply with the reform package. Many of the
terms haven’t been met and the measures have been delayed.
This includes liberalizing the guild system and product markets,
privatizing state enterprises and improving tax collection.
Although the major decline in the Greek stock exchange
complicates privatizations, a slightly faster pace of government
sell-offs is possible.
2 Swedbank Analysis No. 6 • 18 June 2012

3. The question is how the new government will reform the country
and whether it will be able to stay in power for any length of
time considering the many challenges and the differing opinions
between New Democracy (with a right-leaning ideology) and
Pasok (more leftist) about what has to be done.
Even if a new government is formed, there are still several
challenges before it is certain whether a euro zone exit can be
avoided. A decision first has to be made about 11 billion euro in
austerity before the euro zone will release its next payment. If
this doesn't happen, there is a risk Greece will default on its
payments on July 20, when it says it will run out of money. Until
then bank withdrawals will continue, which could eventually
result in an exit from the currency union if it isn't stopped.
Question 3: What would have happened if
Syriza had formed a government?
If Syriza had won the election, received the extra 50 seats and Syriza promised voters
found willing coalition partners to form a government, the they could keep the
situation would have been quite different. Those who voted for euro – but without
Syriza wanted to see politicians who hadn't previously been meeting the terms of
responsible for the country’s mismanagement and neglect. the reform package
They had also hoped that the country could keep the euro, but
without taking the measures associated with budget discipline
and improved competitiveness. Syriza campaigned on keeping
the euro, the emergency loans and the write-offs, but wants to
tear up the austerity package, which they feel is unrealistic.
Instead Syriza would have introduced a national reconstruction
program based on its left-leaning policies.
Had the austerity program been torn up as Syriza promised,
lenders would have probably frozen the emergency loans and
Greece would default on its payments – first in the form of
domestic payments for salaries and pensions and then to
foreign lenders. Syriza had planned to use the interest
payments on the foreign loans to invest in growth.
With even more bank withdrawals, capital flight and bank panic,
Greece would have had to transition back to its old currency,
the drachma, which would probably be valued at 40-50% of the
euro. This would help exports but make imports that much more
expensive. The Greek central bank would have had to print a lot
of money to capitalize the nationalized banks and finance the
government budget, which isn’t yet generating a primary
surplus, i.e., excluding interest payments. With higher import
prices and overheated printing presses, inflation would have
risen to double digits and interest rates would have
skyrocketed.
Syriza, which had promised not to trim the state apparatus, has
at the same time announced that it would raise tax revenues.
The question is whether it would have succeeded in markedly
changing taxpayer behavior in the short term. It is more likely
that little would have come of the party’s election promises.
Swedbank Analysis No. 6 • 18 June 2012 3

4. Turbulence in the financial markets, capital flight and
significantly lower asset values would have also led to corporate
bankruptcies, higher unemployment and the risk of political
instability.
Because the new currency would have cut the wealth of Greek
citizens (and GDP) in half after a euro exit, at the same time
that foreign debt in euro wouldn't have changed in value, a
payment default would have been necessary and led to
increased isolation from investors, lenders and even the EU and
IMF. There would have also been a risk that Greece would have
had to leave the EU.
Geopolitically, Greece’s new friends would have probably
included Russia, China and Venezuela. Tension with Turkey
still exists, and huge cuts in the military budget (from very high
levels) would have increased in the dependence on alliance
partners outside NATO.
Question 4: If the parties don’t manage to
form a government, what will happen?
The parties have already declared that it is crucial a A new election after
government is formed fairly quickly, so there is probably room the summer can't be
for compromise. ruled out
There is still a possibility, however, that the parties will fail to
form a government. For example, there is a risk that Pasok will
not want to govern with New Democracy, since it could be hurt
by supporting policies that go against its core beliefs. Syriza has
already taken over many of Pasok’s supporters. That makes a
new election a possibility. Until then a caretaker government
could be formed, which would delay any difficult decisions and
increase uncertainty and turbulence in the financial markets.
A new election is also a possibility if a new government fails to
last, one of the parties drops out and a majority is no longer in
place to execute the policy. There are fears this could happen
as soon as after the summer.
Question 5: How likely is it that lenders will
accept renegotiated terms?
Even before the election results were finalized, Germany’s It is reasonable to
Foreign Minister, Guido Westerwelle, suggested that the expect that lenders will
austerity could be eased. It is likely, however, that the troika and ease some of their
the euro countries would have handled a Syriza-led government terms
differently. If Syriza had won, it would have been harder to see
the troika meet the new government halfway due to Syriza’s
populist rhetoric and the policies it wants to implement,
including nationalizing formerly public institutions and
maintaining the relatively large public sector – contrary to the
bailout package.
4 Swedbank Analysis No. 6 • 18 June 2012

5. On the other hand, if New Democracy succeeds in forming a
government with Pasok, there is the possibility that the troika
and the heads of the euro zone will agree to ease their
demands. This could include extending the deadline for meeting
the terms (a delay in deciding on 11 billion euros in spending
cuts would be welcome), as well as investments that facilitate a
transition to economic growth.
It is also important that Germany shows empathy for the
difficulties faced by the Greek people now that unemployment
has risen to over 22% and where measures are needed to
assist the many young unemployed in particular. The troika and
euro countries also have to convince the financial markets that
austerity is realistic. Otherwise concerns will continue to spread
to other crisis countries.
Question 6: What do the election results
mean for the euro zone?
The election results increase the likelihood that Greece will The euro countries are
abide by the terms of the bailout package and not exit the euro likely to ease terms
zone. This is provided that the new government supports the somewhat, but there is
package and we don't see a government crisis in the near term. still a risk of a Greek
It is also important that the wave of recent withdrawals in the exit
banking sector can be stopped. The ECB has to support the
Greek central bank and facilitate a capitalization, so that the
bank panic doesn't worsen and spread to other crisis countries.
To receive the next payment, parliament has to find 11 billion
euros in spending cuts, which could prove difficult and create
concerns about a default despite the formation of a new
government. Moreover, it is unclear how the new government
will follow the program, i.e., how quickly reforms can be
implemented and in what way. Without a willingness to reform,
there is a risk that the package will fall apart and spark renewed
uncertainty about Greece’s place in the currency union.
We cannot rule out, therefore, that Greece’s fate will remain
uncertain despite the outcome of the election. In a Greek exit,
the euro zone’s taxpayers would lose over 100 billion euros that
the Greek central bank owes the other central banks through
the Target2 system. Without an exit, it’s more of an accounting
question how the funds will be adjusted between euro countries
within the central banking system, but if Greece is no longer
part of this system the other euro countries (mainly Germany,
which is responsible for about a third) will have to pay the cost.
Lenders will also lose money if Greece exits the currency union.
The ECB has purchased Greek bonds valued at 56 billion euro.
The euro countries have lent Greece 161 billion euros and the
IMF 22 billion. European banks have receivables from Greece
through government bonds they purchased for 55 billion (after
write-offs). International banks still have receivables from Greek
businesses and households worth 69 billion, of which French
banks (37 billion) are most at risk, while British (8 billion) and
Swedbank Analysis No. 6 • 18 June 2012 5

6. German banks (6 billion) are slightly less exposed. This doesn't
include the insurance companies and pension funds that have
purchased Greek corporate bonds.
Another important factor if Greece exits the euro zone is
whether the contagion will spread. The first to be affected would
probably be Cyprus, which has awaited the election results
before formally requesting emergency loans from the EU, ECB
and IMF. It’s possible that the country will need emergency
loans of up to 50% of GDP to capitalize its banks, or about 9
billion euros. Foreign banks have an exposure of 36 billion
euros.
There would also be expectations that Portugal and Ireland
would have to give up the euro, creating further turbulence and
raising risk premiums and financing costs for these two
countries. Even worse is the possibility that this would then
spread to larger countries such as Spain, which already faces
problems in its banking sector, and Italy, whose high debt and
weak competitiveness are worrying markets. Withdrawals from
Greek banks are a problem, but would be even more so if the
contagion spreads to Spanish and Italian banks.
It is equally important how a Greek exit would affect the euro
collaboration in general. A country cannot officially leave the
currency union, but if one or more did so nonetheless,
confidence in the currency would wane. To date the euro has
lost fairly little against other currencies, although its slide has
accelerated of late. If Greece exits, confidence in the euro
would be affected. On the one hand, the currency union would
be hurt by its increased fragility. On the other, it could be helped
by having a weak member drop out and the stronger ones
remain.
Integration in the euro zone would probably be affected as well.
The crisis has accelerated changes in its institutions, and the
pace of reform could slow if instability is reduced. If more
countries exit the euro zone, however, there is a risk that the
EU will also be affected, which could mean less integration in a
number of areas.
Question 7: What kind of market reaction
can we expect?
The outcome of the Greek collection on June 17 should please The equity and
the financial markets. Asian stock markets have risen and the currency markets have
euro has strengthened slightly. The results have to be seen as initially reacted
a relief, since the party that wanted to tear up the austerity positively, but their joy
program didn't win. The risk of an exit from the currency union could be short lived
has temporarily declined, and the new government will provide
a counterparty for the troika to negotiate with. The pace of
reform should increase compared with the caretaker
government and former technocratic government that led the
country in recent months.
6 Swedbank Analysis No. 6 • 18 June 2012

7. The focus of the financial markets has already shifted to Spain
and Italy and eventually will turn to France. The serious
situation facing Spanish banks is also affecting French banks,
and by extension the budgets of both countries. The financial
market is carefully monitoring what the euro zone is doing to
strengthen its institutions and to form a banking union with a
single regulator, a deposit guarantee and resolution practices.
Another priority is how support can be transferred directly from
the structural funds to the banks without raising national debts,
as happened in Ireland and now most recently Spain.
Question 8: How serious is the situation in
the Greek economy?
The situation in the Greek economy is grave. The onslaught of Greece is not in
withdrawals from banks shows a lack of confidence that a euro recession – it's more of
exit will be prevented. Hospitals and energy companies cannot a depression
pay their bills, and without new emergency loans the state will
default by the end of next month. Greece is in its fifth year of
recession. Between 2007 and 2011 the economy shrunk by just
over 13%, and an additional loss of 5-6% is expected this year.
It would seem that Greece is actually experiencing a depression
considering its lost production, high unemployment and
collapse of its economic system.
Greece’s GDP growth (%)
Unemployment exceeds 22% for the population as a whole, but
is around 50% for young adults. One in five people work in
tourism, which is being hurt by uncertainty. The election results
could all generate more last-minute travelers if a government
can be formed and stability is achieved.
Swedbank Analysis No. 6 • 18 June 2012 7

8. Unemployment in several euro countries, % of workforce
The Greek economy has been weak for several years.
Competitiveness is clearly trending lower with rising unit labor
costs due to low productivity growth and rapidly rising labor
costs.
Unit labor costs in manufacturing, index 2000 = 100
180,00
170,00
160,00
150,00 DE
140,00 ES
130,00 FR
120,00 EL
IE
110,00
IT
100,00
90,00
80,00
1996 1998 2000 2002 2004 2006 2008 2010
The low interest rates in connection with the nominal
convergence of the money and bond markets drove real estate
prices higher, which in turn raised consumer prices and reduced
real interest rates. Imports grew substantially, while exports
developed more modestly. The result was a large current
account deficit, which is now being reduced by the slowdown in
the economy and collapse in imports. The key, however, is to
implement reforms that raise competitiveness, not only by
cutting wages and pensions but by improving productivity.
8 Swedbank Analysis No. 6 • 18 June 2012

9. Current account balance in several EU countries, % of GDP
Percent
Question 9: What does Greece have to do
to turn around?
It is important that the new government implements reforms that Greece has to
improve competitiveness in the economy as a whole and implement extensive
budget discipline in the state apparatus. According to question structural reforms – a
8, competitiveness has declined throughout the 2000’s, while necessity with any
Greece was unable to devalue and costs rose faster than in currency system
competing countries. Budget discipline was worse than first
reported when Greece entered the euro zone, which means
that the budget deficit was larger and government debt had
increased more. The key now is to balance revenue and
spending, which means a downsizing of the public sector as
well as better tax collection and taxpayer ethics.
Competition in product markets is being held in check by the
guilds that protect various professional groups. Liberalization
would benefit consumers and stimulate growth. State-owned
enterprises have to be privatized in order to increase
productivity and efficiency. To date the pace of reform has been
slow, but it is critical that the austerity package agreed to is
followed at the same time that weak groups are better
protected.
Greece’s politicians haven't supported the reform package yet,
which creates a risk that it will fail. The new government has to
take responsibility and ownership for the economy. This will be
Swedbank Analysis No. 6 • 18 June 2012 9

10. the most important element in the negotiations between the
troika and the government, which means that the troika has to
agree to concessions and the government has to take over the
program. It is uncertain whether this will happen considering
that the parties – the same ones that signed the agreement –
haven’t taken responsibility so far.
Question 10: What do developments in
Greece mean for the Nordic and Baltic
regions?
Only Finland and Estonia, as euro members, are affected by the The Nordic and
negotiations with the Greek government on terms and loan Baltic countries are
programs. Although it is unlikely that more money will be given mainly being affected
to Greece, an extended deadline to meet the terms could make through export and
the program more expensive. investment markets
If a government is successfully formed and an exit from the
currency union is avoided, the election results could mean a
slight improvement in the euro zone’s situation thanks to
increased stability. This would benefit exports and investment in
the Nordic and Baltic region as well. Less uncertainty would
also help the economy by encouraging households and
businesses to spend and invest.
Many questions still remain, however, and concerns about
Spain and Italy have grown. Greece has taken a small step in
the right direction, but there is still a risk that it may default on
its payments and exit the euro zone – a risk that continues to
create concerns about the euro zone, but also for Europe,
including the Nordic and Baltic regions. It will take many years
to strengthen the institutions in the euro zone, improve
conditions in the crisis countries and create stability and growth.
Until then northern Europe will see its key export markets grow
below their potential. Creating increased political stability is
imperative if the countries are also going to tackle their
economic challenges.
Cecilia Hermansson
10 Swedbank Analysis No. 6 • 18 June 2012

11. Economic Research Department
Sweden
Cecilia Hermansson +46 8 5859 7720 cecilia.hermansson@swedbank.se
Group Chief Economist
Chief Economist, Sweden
Magnus Alvesson +46 8 5859 3341 magnus.alvesson@swedbank.se
Head of Economic Forecasting
Jörgen Kennemar +46 8 5859 7730 jorgen.kennemar@swedbank.se
Senior Economist
Anna Ibegbulem +46 8 5859 7740 anna.ibegbulem@swedbank.se
Assistant
Estonia
Annika Paabut +372 888 5440 annika.paabut@swedbank.ee
Chief Economist, Estonia
Elina Allikalt +372 888 1989 elina.allikalt@swedbank.ee
Senior Economist
Latvia
Mārtiņš Kazāks +371 67 445 859 martins.kazaks@swedbank.lv
Deputy Group Chief Economist
Chief Economist, Latvia
Dainis Stikuts +371 67 445 844 dainis.stikuts@swedbank.lv
Senior Economist
Lija Strašuna +371 67 445 875 lija.strasuna@swedbank.lv
Senior Economist
Lithuania
Nerijus Mačiulis +370 5 258 2237 nerijus.maciulis@swedbank.lt
Chief Economist, Lithuania
Lina Vrubliauskienė +370 5 258 2275 lina.vrubliauskiene@swedbank.lt
Senior Economist
Vaiva Šečkutė +370 5 258 2156 vaiva.seckute@swedbank.lt
Senior Economist
Economic Research
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Cecilia Hermansson,
damages, direct or indirect, owing to any errors or omissions in Swedbank
+46-8-5859 7720.
Analysis.
ISSN 1103-4897
Swedbank Analysis No. 6 • 18 June 2012 11