Greek Election Likely to Have Muted Effect on Markets

By | January 26, 2015

As Greek leftist and Anti Austerity party Syriza, won election with majority, investors were bracing for a volatile reaction in markets. But some analysts say the wider impact is likely to be contained.

The results of the vote are all-important for the future of Greece, but their broader effects will be cushioned both by Greece’s isolation from the euro-zone financial system and by the massive program of bond-buying launched by the European Central Bank on Thursday, said Lucy O’Carroll, an economist at Aberdeen Asset Management.

“The contagion is not completely gone,” she said. “But it is reduced.”

Analysts at AXA Investment Management said markets could be volatile in the aftermath. “The uncertainty caused by negotiations between Greece and international lenders is likely to take its toll on risk assets, in the euro area at least.”

But they added that even if Syriza wins on Sunday, Greece’s elections are likely to have either a “marginal” effect or “no material impact on the rest of the euro area.”

Carlo Messina, chief executive of Italy’s Intesa Sanpaolo SpA, said in an interview that he isn’t worried about any market fallout from the vote. He said the ECB’s plans for quantitative easing will provide breathing room for markets and introduces the possibility of a modest debt restructuring that would avoid a Greek exit from the eurozone. “I don’t think this will be a major point,” he said of Sunday’s elections.

Markets in Europe are still digesting the full impact of the ECB’s announcement of quantitative easing, which itself came just days after the Swiss National Bank shocked markets by removing the Swiss franc’s cap against the euro, sending the single currency plunging in the days since.

In the 2½ years since Greece’s government last collapsed, Europe’s banks have slashed their exposure to the country’s banks and sovereign debt and the region’s other struggling economies have made significant steps toward stability.

Greece’s borrowing costs have decoupled decisively from those of Portugal, Ireland and Spain, which recently reached record lows even before the ECB announced it would start monthly purchases of €50 billion ($56 billion) in sovereign bonds.

By contrast, markets are still demanding a yield of 10% to lend to Greece for 2½ years, whereas its 10-year bonds are paying yields of around 8%. Markets often charge more to lend short-term when investors are worried about the prospect of a default.

Markets shouldn’t write off the possibility of some contagion from Greece, said Peter Westaway, chief economist at Vanguard Asset Management in Europe. “Greece is still a little bit ringfenced now…[but] there’s almost a complacent view that Greece is completely off the radar,” he said. “A damaging exit from the euro is not out of the question,” he added.

Mark Burgess, chief investment officer of Threadneedle Investments, warned, “If Syriza does not cooperate, Germany may feel that it can ask Greece to leave the eurozone.”

A spokeswoman for Syriza denied that any victory by the party would be taken badly by markets. “Our victory will mark the beginning of a different era, for the whole of Europe, in which economic growth and development will take the place of austerity measures,” she said.

Source:WSJ

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