The election result will be known late at night on Sunday 6 May. Following that, if no party has the majority of the votes (which is the most likely scenario), the president will ask the leader of the first party in votes to try to form a government (e.g. through a coalition) that enjoys the confidence of the parliament. If this fails or the party withdraws from its right, then the second party is asked to do the same and so on. The process is repeated for the three largest parties and each one has a three-day deadline. If these attempts fail, the president calls the parliamentary leaders of the parties on a last attempt to form a broad coalition government. If that is also unsuccessful an interim government is formed that would lead the country to a new election within a month.

What if Greece does not deliver? We think that there is a clear risk that the IMF simply refuses to make the next payment. In that case it is probable that the EU would follow suit. However, it is unlikely in our view that payments would stop altogether; rather, they might be postponed until Greece fulfills its obligations

The Challenge for The Next Government From the first week in office, the next government will face significant challenges. First off, a decision will need to be made for the Greek international-law bond maturing on the 15th of May the owners of which have held out from the PSI process. The outstanding notional is not large (about EUR430mn) but the broader implications of a no-payment decision are unknown, while the political backlash from a payment may be large. Second, by June, budget cuts worth about 11.5bn EUR for the rest of the program period will need to be specified. There is little room left in the budget to promote such an adjustment without affecting public sector wages and pensions. Third, pressure from international lenders will likely shift on product market reforms going forward. This implies a focus on privatizations, opening up closed professions, reducing barriers to entry for new enterprises, reducing assured profit margins for various sectors etc. Previous governments have been unsuccessful in clashing with organized professional pressure groups and creating a true competitive market for goods and services. Thus the reduction in wages has not been followed by negative trends in market prices as well. Fourth and final, the recapitalization of the banking system in a format that makes it easy for banks to attract private capital in the future is a key element of the recovery process. Whether the dispersion of the EUR130bn rescue package continues depends on the new government’s actions, decisions and choices on the issues above. Greece needs the dispersion of funds in order to clear out arrears, avoid cash shortages, and build buffers for additional banking sector recapitalizations in the months to come. Near Term Election Uncertainty is Probably Overstated Given the pressing issues at hand for the next government and the downside that lack of policy action could entail, we are inclined to think that the political incentives are aligned towards the formation of some kind of government following the election on Sunday. As we discussed in our latest note on the subject, despite the low polling rates of the two major parties, PASOK and New Democracy (ND), the electoral law provisions make it likely that they are able to form some type of coalition government on Monday. And even in the extreme event that they don’t, there are other small moderate parties who favor stability and government continuity who could be brought in to form an interim government. What is more important to focus on is the balance of power within the next governing coalition, the number of seats it commands in the parliament as well as its composition. These factors would determine the room for the next government to be truly functional, its lifespan and its desire to proactively introduce crucial market friendly reforms. How to Think of The Day After Without diminishing the probability that an extreme and unexpected outcome occurs, we would focus on what we consider the most likely outcome, as discussed earlier. And based on this, we discuss the criteria to judge the result on Sunday.