In memory of Dr. Andreas Höfert

Greece rears its head again…

| Tags: Andreas Höfert

On 26 January, an asteroid named 2004 BL86, estimated to be between 400 and 1,000 meters in diameter, will pass the Earth at a distance of 1.2 million kilometers, aggressively encroaching what astronomers consider the “safety zone” around the planet. On the same day, something else might hit the markets much harder: the results of the Greek snap parliamentary election.

Since the Greek parliament failed to elect the country’s president on 30 December, all eyes are back on peripheral Europe. The latest polls suggest a victory for the extreme-left Syriza party following the vote on 25 January. Syriza and its leader, Alexis Tsipras, have been known to question Greece’s membership in the single-currency union. Having seen power within reach, they have toned down their agenda somewhat.

Nonetheless, they remain intent on renegotiating Greece’s agreements with the (in)famous troika of lenders: the European Union, the European Central Bank, and the International Monetary Fund. This would amount to a walk on very thin ice and has the potential to disrupt markets. Talk of a potential “Grexit” has even resurfaced. So is it really 2012 all over again?

There are still a couple of lines of defense that could spare markets from another rout. The first is that the New Democracy party of incumbent Prime Minister Antonis Samaras has narrowed its gap with Syriza; the latest polls suggest it may even win the election, which means coming out in first place. This is important because, according to Greek electoral law, the party with the most votes gets a bonus of 50 seats out of the 300 seats in parliament; the other 250 are distributed to all parties in proportion to their share of the votes. But this line of defense is not solid. With only two weeks before the election, we doubt the current support for the incumbents will suffice to overtake Syriza.

The second line of defense is tougher. Even if Syriza wins, the party will not have an overall majority in parliament and thus will need to build a coalition government, likely with some less-extreme partners. Such a government might be willing to seek more compromises with the Troika than a pure Syriza government would. Still, this line of defense has a caveat: Syriza might well be unable to form a coalition. In this case, if New Democracy is equally unable to form a majority, Greece might end up with a hung parliament, leading to more political uncertainty and new elections.

A third line of defense was voiced last weekend by several German politicians and government officials: that letting Greece exit the Eurozone is no longer the big deal that it was in 2012. The private sector, especially the banks, has hardly any exposure to a potential new Greek sovereign debt default. And while the prospect of a Syriza win has catapulted Greek interest rates, it hasn’t affected the bond yields of other peripheral countries such as Spain, Italy, and Portugal. Thus, it may be safe to assume that a potential Grexit would not lead to contagion.

This line of defense – or should we say offense – is tenuous. First, Greece has little interest in leaving the Eurozone; even Tsipras agrees with this now. Second, a Eurozone member cannot be ousted from the common currency. De jure, Eurozone membership is “irrevocable.” De facto, the ouster could be done by having the ECB cut Greece from its liquidity cord. This would need a majority agreement among the other members, which is not a given. Finally, remember that “everything is under control” are the second-most-expensive four words a central bank could say, after “this time is different.” Former Fed President Ben Bernanke, who let Lehman Brothers file for bankruptcy in 2008, would attest to that.

In our view, no one, with the exception of die-hard euroskeptics, has an interest in a Grexit – not the EU, the ECB, Germany, or even Greece. Thus, at this point, we see only a 10% chance for it to happen. This said, Greece is once again a source of market volatility and should remain so for quite a while.