‘Grexit’ a significant risk once more: Berenberg economist
LONDON (MarketWatch) — Brace yourselves for a Greek earthquake this weekend.
On Sunday, Greek voters head to the polls for a snap general election, called after their parliament in late December rejected PRIME Minister Antonis Samaras’s preferred candidate for president.
The far-left, euroskeptic party Syriza looks poised to win, having increased its lead in opinion polls as election campaigns rolled on. If it does get into power, its anti-austerity policies threaten to derail Greece’s bailout PROGRAM. In fact, words like “Grexit” and “default” and “accident” are once more being thrown around among nervous MARKET observers.
And the European Central Bank only heightened the Greek drama when it launched its plan for quantitative easing on Thursday. Under that plan, Greece must soldier on with its bailout to be included in the central bank’s bond-buying program.
With the euro EURUSD, +0.00% already under pressure, expect the tension to keep building until the election on Sunday. To understand the outcome — expected late Sunday or early Monday in Europe— here are the five key things to know about the parliamentary elections as an investor.
Which parties should I watch for? Think Syriza,
Anti-austerity and anti-bailout Syriza, behind charismatic leader Alexis Tsipras, could hold the key to Greece’s future as a member of the eurozone. The party is ahead in opinion polls, and Tsipras appears confident he’ll emerge as prime minister after the elections.
“Be optimistic and cheerful,” he reportedly proclaimed after the presidential vote in December. “Austerity will soon be over. The Samaras government, which looted society and decided to take further austerity measures, is finished.”
Syriza has spent years campaigning against the harsh austerity measures imposed on Greece in exchange for the international rescue program and is eager to renegotiate the bailout terms with its international creditors — the so-called troika, composed of the European Central Bank, the European Commission and the International Monetary Fund — sooner rather than later. A major concern is that Syriza and the troika won’t be able to reach new bailout terms, which could force Greece into a disorderly default. The four-year bailout was set to stop at the end of December but was extended by two months to allow Greece more time meet demands from its international lenders.
“The truth is that Greece’s debt cannot be repaid as long as our economy is subjected to constant fiscal waterboarding,” Tsipras told German newspaper Handelsblatt earlier in January. “Our goal is to reach a new agreement within the euro that would allow the Greek people to breathe.”
The other major party in the election is current Prime Minister Antonis Samaras’s center-right New Democracy. The party emerged as the WINNER in Greece’s last national elections in June 2012 and has as the leader of the coalition government been in charge of the reforms and austerity measures agreed to under the bailout program. However, with unemployment painfully high and economic growth painfully low, Greeks have increasingly turned against the governing coalition with calls for an end to austerity.
In a bid to win over more votes, Samaras has pledged that there “will be no more pension or wage cuts”, and that the next step will be TAX cuts “across the board”.
What are the risks of a Greek default or a euro exit?
With polls pointing to a Syriza win, the fear of Greece leaving the eurozone is back on the table. Although the party has moderated its anti-euro rhetoric, there remains concern that the drive to end austerity above everything else could cost Greece its membership in the currency union.
Holger Schmieding, chief ECONOMIST at Berenberg, has put a 40% probability that Syriza “would push Greece into a serious crisis that — with money running out and neither the troika nor the ECB in any position to help — could potentially catapult Greece into a messy default within the euro or even out of the euro.”
However, even if the so-called Grexit were to materialize, Schmieding doubts it would inspire separation ideas elsewhere in Europe. “We see no significant probability that any other country would want to follow. Greece’s likely return into a deep crisis in case of Grexit would likely deter any discussion about following suit,” he said in a note.
A Eurobarometer poll back in the fall of 2014 indicated that the population prefers to stay in the euro. The poll showed 63% of the Greek respondents were in favor of the currency union.
Is the European Central Bank watching this?
You bet it is. The ECB on Thursday delivered an aggressive and larger-than-expected PROGRAM of sovereign bond purchases, embarking on full-blown quantitative easing starting in March.
Concerns about Greece helped shape the program, and the aftermath of Sunday’s elections could help determine whether QE is a success.
So, if a Syriza-led government were to take Greece out of the bailout program, Greek bonds would no longer be eligible for purchase. Moreover, the ECB set two conditions that will give it some leverage over any new government.
Under the plan, the ECB can’t buy more than 25% of any individual bond or more than 33% of the paper issued by any single government. Draghi indicated that the ECB counts Greek bonds it purchased previously through its now inoperative Securities MARKET Program toward that limit, meaning that it wouldn’t be able to buy any Greek paper until some of those bonds are redeemed in July, noted Philip Shaw, strategist at Investec, in a note.
“This seems to be a neat way of deferring any potential Greek bond purchases until the ECB is more confident over the credit risks,” Shaw said.
In addition, losses on 80% of the debt purchases will remain the responsibility of national central banks.
What will happen to Europe’s financial markets?
For Greek assets, the fallout from the elections could be quite significant. The Athex Composite index GD, +6.14% is down 20% since early December, while it shaved off almost one-third of its value in 2014, with the biggest losses happening last month.
The yield on benchmark 10-year Greek government bonds GR:GR10YT has also surged and is trading at around 8.5%. If Syriza wins, more weakness could be in the cards for the Greek stock and bond MARKETS, and it could even take a further toll on the beaten-down euro.
Ashley of RBC Capital Markets said that the Greek drama is a “manifestation” of “the overarching political risk that is evident in the euro area” and has already been one of the factors that have brought the euro EURUSD, +0.00% to its knees, recently hitting an 11-year low against the dollar. The euro traded at $1.1253 on Friday, two days before the election, with the recent ECB action helping drive it down. See: Greek stocks are a great buy regardless of the elections
What does this mean for the rest of peripheral Europe?
It feels as if we’ve been here before — Greek political chaos triggers Grexit fears and wider eurozone jitters — but this time it’s different. Back in 2012 when Greece held two elections within two months, investment banks prepared for a eurozone breakup and interest rates went crazy in Italy and Spain as well as Greece, contagion was a real issue for investors.
But a lot of things have happened over the past two-and-a-half years. ECB President Mario Draghi has vowed to do whatever it takes to save the currency union, and the European Stability Mechanism is in place to ensure country-specific woes don’t spill over into other nations.
In addition, other peripheral countries, such as Spain and Ireland, are largely back on sound footing and are better suited to deal with shocks.
“The eurozone now has a well-oiled machinery to deal with crises,” said Schmieding in the Berenberg note. “The eurozone could probably handle a potential Greek accident with no more than very limited and temporary damage.”
MarketWatch’s William Watts contributed to this report.