This weekend sees the Greek people go to the polls for the fifth time in eight years. If there is one country that has come to characterise the pitches and turns of the Eurozone debt crisis it is Greece.
The failure of the ruling coalition to find an electable President at the third time of asking in December was the trigger for these elections, and the uncertainty surrounding them has increased bets that Greece could easily leave the Eurozone. Certainly the leading party in the polls has captured the public’s imagination by talking of renegotiating the bailout program, leaving austerity behind but remaining in the euro.
Syriza party still ahead
The polls coming into the last week of campaigning have been remarkably stable. Alexis Tsipras’ Syriza party remains ahead of the ruling New Democracy party and the current PM Antonis Samaras by around three percentage points. We think that this lead will be maintained into polling day. If that is the case then, as is the case in Greek electoral law, they will be awarded 50 extra seats for winning the popular vote. While the polls suggest that this will not give the Syriza party an overall majority, the prospects for a left-leaning government – a partnership with PASOK or the new KIDISO party for example – are very possible.
A re-election could badly impact markets
There could be two elections in a very short time. The leading party in the absence of an overall majority is given three days to form a majority before powers pass to the second. If they and the third party are both unable to form their own coalitions over the following six day period then another election is called. This would be a strong negative for markets as investors would only see increased uncertainty around upcoming reviews of austerity, credit lines and debt forgiveness.
Our central scenario is that nobody gets what they really want in this election; if Syriza wins the primary poll, a coalition is fudged together and negotiations are made between the government and the Troika over reengineering the country’s debt burden. Both take a hard line and market volatility increases as chatter around the disagreement and the prospects of a Greek exit from the Eurozone increases too.
Greece could leave euro
A Greek exit is the nuclear option and one that, in our view, the Greek political class is mainly opposed to. It is possible, but only if the negotiations sour so much that Greek banks no longer have the ability to post Greek sovereign debt as collateral for loans from the European Central Bank.
A longer delay in these plans would leave the Greek state in a form of limbo that could lead to capital controls on Greek money – similar to what happened in Cyprus – to ensure we do not see a run on Greek banks. As we noted when controls were imposed on Cypriot account holders back in 2012, this creates a two-tier Europe that is inconsistent with a currency union. That is not to say that it won’t happen of course. The European single currency experiment has seen a lot of firsts, not all of them good.
How will markets react to the election?
I believe the market reaction will be split into three separate phases; the electoral result, increased pessimism of a deal and then systemic risk lessening. Of course, this election will be taking place in the days after a European Central Bank meeting that saw the launching of an asset purchase program in order to stimulate the Eurozone economy.
As I mentioned before, a Syriza victory is largely priced into markets at the moment and therefore we are not expecting the results to post large euro losses or gains. We would most likely see a small rally for the euro, a slight fall in peripheral bond yields and a rally in local stocks.
As the negotiations drag on and rumours of discord abound – as they always do in these situations – then some negativity will creep back into European markets as chatter around a Grexit increases. We think that there is definitely the prospect of contagion into Italian and Spanish bond markets although at a far diminished level to what we saw through the summer of 2012.
Calm after the storm
Finally, as has been the outcome of numerous elections, riots in Syntagma square and bailout packages, the situation in Greece will quieten. We forecast that fiscal reforms will remain ongoing within Greece – but at a slower pace for longer – and that debt would be rescheduled so as to cut interest payments and extend the maturity of said loans. By how much these payments are cut and for how long remains the stumbling block between both parties at the moment and will likely be the sticks with which each choose to beat the other.