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Mohamed A. El-Erian Headshot

Three Big Questions for the Greek Elections

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Greece desperately needs a political anchor. Will it get one? This can either take the form of a single party gaining a durable majority in parliament or the formation of a coalition government.

If Sunday's election fails to yield such an outcome, the president would have no choice but to call for a third election. The country's political turmoil would intensify, making it very difficult (if not impossible) for Greece to secure financing from its official external creditors (known as the "Troika," and consisting of the European Central Bank, European Union and International Monetary Fund).

Given the higher risk of running out of money, Greece would face even greater economic and financial chaos. Citizens would stop paying bills, tax receipts would dwindle even more, and capital would flee the country in troves.

The Greek government would have no choice but to redefine the institutional context for the country's medium-term recovery. And it would most likely involve a messy exit from the eurozone.

Absent coordinated and decisive central bank responses, Europe as a whole would face a material risk of what economists call a "sudden stop" to the payments and settlement system. Realizing this, and with the traumatic September 2008 experience still fresh in their minds, officials around the world have reportedly been working hard on contingency plans.

This is good news. Yet, as detailed in my Financial Times column of Friday, there are limits to what even the best-intentioned and most-effective central banks can deliver. Specifically, they can restore the normal functioning of markets but, unfortunately, cannot fully counter the economic damage.

Europe would be plunged into a deeper recession. More capital would abandon other vulnerable eurozone economies. And the region's core economies, led by Germany, would be forced into considering crucial measures to save their important and historic European project or see it crumble.

Given the size and international linkages of Europe, virtually every country in the world would face economic and financial headwinds. Their exports to Europe would fall, credit availability would decline and risk aversion increase.

The other possibility is that the election allows for the formation of a stable government, led either by a single party or a coalition of parties. This, in turn, would lead to the second question.

Would a new Greek government be able to mobilize sufficient internal and external support as it embarks on one of the most difficult economic adjustments in modern European history?

Given that Greece's program with the Troika is off track, a new government would have to move quickly to design new measures and secure the support of both citizens and creditors for implementation. This is not easy given the extent to which the economy has imploded, and continues to implode. Moreover, the government has few policy tools; and the patience of the Troika is already stretched.

The situation could quickly come to a boil if the new government were to decide to embark on a different course than that favored by the Troika. No wonder Mrs. Merkel, Germany's prime minister, is on the tape again this weekend cautioning that there are few policy alternatives for Greece.

If the Greek government fails to establish relatively quickly its leadership and credibility, the country would again face mounting economic, financial, political and social tensions. If it does succeed, the third question would become even more critical.

Will Greek depositors continue to flee?

It is not easy to stop bank runs once they start. Indeed, as a famous investor once observed, the rational thing to do when you see a line outside a bank is to join it; and if you do not have your deposits at that bank, go quickly to where you do and join the line there.

After all, it is a very asymmetrical payoff for your life savings. Therefore, in most states of the world it is better to be overcautious and pull your money out rather than face the risk of confiscation and redenomination.

A new Greek government would have to work very hard to quickly -- and I stress quickly -- stop citizens from withdrawing their deposits. And it would need to do so without imposing controls.

If it succeeds, the new government would have earned the room to implement a new program for Greece; and its European neighbors and the rest of the world would breathe a huge sigh of relief. If it does not, the country would again be in turmoil, with negative externalities for others.

Whichever way you look at it, Sunday's election in Greece entails major uncertainties. What is clear is that, by itself, the outcome is very unlikely to immediately end turmoil and uncertainty. Indeed, even a simplified analysis entails many permutations and combinations.

Cross-posted from CNBC.com.