PARIS - New Democracy's narrow victory in the Greek parliamentary elections, while presaging another period of political turmoil in Athens, has at least spared financial markets the immediate crisis that many central banks had been girding for.
With a combined total of more than 160 seats, New Democracy and the Socialist party Pasok have more than the 151 needed to form a new coalition government. While the government is likely to be weak, it will continue to support the Greek bailout, removing the immediate risk that Greece will be cut off from funding and forced to leave the Eurozone.
"A major bullet has been dodged today," said Jacob Kirkegaard, a research fellow at the Peterson Institute for International Economics.
Kirkegaard said he expects a period of political instability in Athens over the coming days as leaders of New Democracy and Pasok spar with Syriza, the radical left party that rose to prominence by rejecting the bailout agreement. But in the end, he said, none of Greece's political leaders will risk a third election.
In a politically explosive statement shortly after the election result was known, Pasok leader Evangelos Venizelos inexplicably declared that he would not agree to join a governing coalition that didn't include Syriza.
"There will be a week or so of instability as the governing coalition is settled, but I think in the end the result is a given, which is generally market positive in my opinion," he said in an e-mail.
Nicholas Spiro, managing director of the consulting firm Spiro Sovereign Strategy, said the election result was "the least market unfriendly for the simple reason that Syriza did not come out on top."
But he said the result, in which more than a quarter of voters backed Syriza, showed that Greek citizens have "deep reservations" about the conditions attached to Greece's membership in the Eurozone. Consequently, the new government will face stiff social and parliamentary resistance to the austerity measures demanded by its European partners.
"Although the worst-case scenario of a Syriza victory has been averted, investors are still confronted with the risk of a disorderly Greek exit from the Eurozone and the continued absence of a strong enough firewall around Spain and Italy," Spiro said.
The Eurogroup of Eurozone finance ministers said in a statement that continued reforms are Greece's "best guarantee" of overcoming its economic crisis and that inspectors from the troika -- the European Commission, the IMF and the European Central Bank -- will return to Athens once a new government is in place.
In return for the new government's renewed pledge to stick to the bailout terms, analysts expect the troika to agree to some flexibility in the terms of the bailout deal, but no wholesale modifications.
"The euro area will probably grant some modest face-saving changes in the austerity timetable and have some more infrastructure investments ready to let Samaras claim to 'have renegotiated better terms,'" Kirkegaard said, referring to the Greece's expected new prime minister, the New Democracy leader Antonis Samaras.
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