Greece: commentators hold their nerve

Greek parliament1A Greek exit from the euro, a topic that has resurfaced since December 29 when Athens called a general election, is not a major expectation for at least some fund managers who stand back and contemplate the latest

chapter of the financial crisis.

Behind some of the uncertainty that has hit equity and bond markets in the first days of the year, is the Syriza party. Tipped for power after the January 25 election, Syriza is against the terms placed on Greece in return for its international rescue loans, or bail-outs, and it wants to restructure Greek debt.

This has put Greece back in the headlines for the wrong reasons. But managers point out that Greece – and the Eurozone – are not in the same position as they were three years ago when Greece had to pay 30% to borrow money from worried lenders.

Though its yields have risen since December 29, Greece now pays around 10% and other countries badly hit by the financial crisis, such as Ireland and Spain, have also seen dramatic falls in their borrowing rates as confidence by creditors increased.

Greece is also expecting a primary budget surplus – that is, the surplus before interest payments – of 2% of GDP in 2014, surpassing EU and International Monetary Fund (IMF) targets of 1.5%.

When the final figures are out, the Greek economy may also have returned to growth in 2014.

These factors make some observers less nervous.

David Absolon, investment director at Heartwood Investment Management in the UK, says the market implications of the general elections should be "relatively contained".

"A Syriza election victory would obviously increase Greek credit risk – ie, the higher probability of a country default – and raise concerns of a Greek exit from EMU [European Monetary Union]. On balance, however, we believe that the market implications should be relatively contained," he says, noting factors such as Greece's lower borrowing costs and the possibility of growth.

He adds: "The majority of Greek government debt – approximately two-thirds – is owned by either the European Union or the IMF. Market liabilities are therefore fairly limited."

And he adds that while the risk of Greece exiting the EMU is "very real", Syriza does not support this scenario and current polls, Absolon says, indicate that 60% of Greek voters want to stay in the euro.

Eric Chaney, Maxime Alimi, Manolis Davradakis, and Greg Venizelos of Axa Investment Manager's research and investment strategy team, say in a note that a "systemic worst case scenario in Greece is very unlikely, though can't be totally ruled out".

The elections are likely to yield a government led by the anti-bailout leftist party Syriza, they say, but the team's baseline scenario is that the new cabinet and international lenders "agree on alleviating the weight of Greece's national debt, on completing and ending the bailout programme and help Greece to regain access to the markets" with an emergency credit line.

A "very remote" worst-case scenario, a consequence of unforeseen dramatic political events, could lead to Greece defaulting on bonds due to the European Central Bank (ECB) and eventually leaving the euro.

"Preventing contagion and self-fulfilling consequences would then be in the hands of euro area governments and the ECB," the team says.

In the heat of negotiations with lenders, risk aversion and "risk-off" positions may hurt equity markets, says the team, but apart from the Greek government bond market, there is no significant spill over effects on other euro area sovereign markets, because markets know that the ECB is ready to act.

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