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What's Next for Greece? More Chaos

View over the caldera of Santorini in Greece.
Tom Pfeiffer | Getty Images
View over the caldera of Santorini in Greece.

The Greek elections. That didn’t take long: New Democracy, the conservative party, has already given up on forming a coalition; they have now passed the torch to Syriza (the Left coalition) which won the second largest number of votes.

The chances they will form a coalition is small as well. This is a loose composite of quarreling left parties.

It's pretty simple: the two parties who supported the austerity deal with the Troika (IMF/EU/ECB) (and the two parties who are primarily responsible for getting Greece into this mess) got killed. They do not have the parliamentary seats, or the political legitimacy, to form a coalition.

How much of a mess are things?

About 20 percent of the vote went to parties so small, and extreme, that they did not clear the 3 percent threshold necessary for representation.

All morning, traders have been passing around calendars of the next couple of months. Here's what it looks like:

June 10: new elections? With only one-third of the votes going to the two parties supporting the austerity deal, new elections seem inevitable. Yes, a coalition is still possible, but it's unlikely to hold.

June: Troika review. Remember them? A deal was made between the Troika and the Greek government: roughly 130 billion euros in aide, a restructuring of Greek debt, and promises of deep budget cuts and restructuring of government payouts.

In June, the Troika comes back to see if the Greeks are living up to their end of the deal. What do you think they are going to see, if the demonstrators even allow them inside the country?

June 30: Greek Parliament must approve additional cutbacks to cover budget gaps in 2013 and 2014 under bailout plan.

That's right: the Parliament has to approve more cutbacks.

How are they going to do that when the majority of the people elected are opposed to the austerity plan?

And what about the existing austerity measures? Will they even be implemented by the people who were just elected? There's pension reductions, public sector wage cuts. Nobody wants it.

Which leads to: Bailout Part 3. Renegotiate Greek austerity deal. Does anyone think the Troika will agree to another renegotiation?

August: next disbursement from Troika. Without the money from the Troika, the pensions don't get paid. Nothing works. Social unrest rises.

If Greece really does go to the edge, and does actually leave the euro, is that priced in? I don't think so. I think this would lead to more capital flight from peripheral countries (including Portugal and Spain) to the core.

What would the ECB do, as the guardian of the euro? Forget Band-Aids, like a new LTRO (cheap money) or buying government bonds; if there is a real crisis, and Greece leaves the euro, it will likely not be enough.

Now you will really see who blinks first. Mr. Hollande and others, in a panic, will likelydemand the ECB start printing. How? There is a government rescue fund called the European Stability Mechanism (ESM), currently 500 million euros, that is to run concurrently with the European Financial Stability Facility (EFSF). Hollande and others will argue that the ESM should have access to the ECB balance sheet. That's how it will start.

Here’s how the vote broke down:

New Democracy (conservative) 18.8%

Syriza (radical left) 16.8%

PASOK (socialist) 13.2%

Independent Greeks (right) 10.6

Communist 8.5%

Golden Dawn (far right) 7%

Democratic Left 6.1%

Others 22%

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