Election Should Have Minimal External Financial Impact.
Greece, never short of drama, has launched into another act.
After Prime Minister Antonis Samaras failed in the third and final vote Monday to gain support for the government’s presidential candidate, Stavros Dimas, a snap general election will be held on Jan. 25. Investors elsewhere in the eurozone should brace for greater volatility. Severe disruption is less likely, though.
Only 168 parliamentarians voted for Mr. Dimas, 12 short of the number required to approve his candidacy. Greek stocks and bonds took it hard on Monday. The Athens stock market fell more than 10% before staging a recovery; 10-year Greek bond yields rocketed to 9.3%.
Yet, while Italian and Spanish bond yields also rose, their move was fairly limited. Greece is now the clear outlier in eurozone government bonds; yields elsewhere have fallen to record lows.
The Greek election campaign seems likely to provide plenty of headlines that could roil markets. The race looks like a close one. While polls put the left-wing antiausterity Syriza party in the lead, current coalition leader New Democracy has been closing the gap.
Intense focus will be put on Syriza’s call for a restructuring of Greece’s debt, although party leader Alexis Tsipras says he intends to honor the country’s market obligations and International Monetary Fund loans. But with the Greek yield curve already inverted—its three-year bonds yield more than 10-year bonds, a classic sign of distress—a lot of bad news is priced in already.
For other eurozone bonds and stocks, election rhetoric from the parties is likely to provoke only knee-jerk moves, unless the risk of a Greek exit from the euro starts to rise. But it is worth remembering that a majority of Greeks still back the euro. The fall 2014 Eurobarometer opinion poll showed 63% in favor versus 35% against. Support is lower in Cyprus, Portugal and Italy.
Meanwhile, for the rest of the eurozone there is, in any case, a much bigger actor waiting in the wings: the European Central Bank.
Although it isn’t a done deal, the ECB may yet buy eurozone government bonds in an attempt to combat ultralow inflation. That is likely to provide an anchor for bond yields outside Greece. Any talk of a Greek debt restructuring would be a reminder of the risks around eurozone quantitative easing and an illustration of how it differs from the bond purchases undertaken by the U.S. Federal Reserve or the Bank of England. But Greek bonds were always going to prove a contentious issue for the ECB in designing its program anyway.
It will pay to watch developments in Greece closely, though more because of how they may influence debates elsewhere. With elections due in the U.K., Spain, Portugal and Finland next year, and new parties making a name for themselves, Greece’s political drama isn’t the only one that will keep markets guessing, and vulnerable to surprises.
source: wsj.com
STUDIO 3 NEWCASTLE AUSTRALIA 