Greece is the word

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Greece is once again the word.

It’s just not the one that everyone wants to hear, with speculation over the outcome of the general election on 25 January raising old ghosts. Today is very different to 2012, when snap elections saw a strong surge in anti-European sentiment and the dramatic rise of the left wing, anti-austerity Syriza party.

The eurozone still faces many economic problems, but the firewalls put in place by the European Central Bank (ECB) have effectively removed the threat of contagion to other countries. Nevertheless, given the groundswell of support for eurosceptic parties in Greece and across the continent, the political backdrop could be fraught in 2015.

Investor nerves about Greece are clearly reflected in bond markets and the rising cost of borrowing for the Greek government. The 10-year yield on Greek sovereign bonds has increased by 492 basis points since September of last year to over 10% as of 7 January. However, investor nerves have not crept into other southern European countries. The yields in the other “crisis” economies of Spain, Italy and Portugal have in fact moved in the opposite direction and continue to decline.

Intervention from the ECB over the last few years goes a long way to explaining why the current Greek crisis has so far been contained, but the eurozone itself is a very different place now compared to 2012. The threat of a Greek default or Greece’s exit from the euro appears, therefore, to be potentially less damaging. However, even if the economic implications are limited the political ramifications of a Greek exit would reverberate throughout the region. Spain and Portugal are to hold general elections this year and the rise of eurosceptism in these countries suggests that anti-European parties will do well.

After years of painful austerity it is little wonder the Greek people would take a less than favourable view towards European leaders and those forcing the tough measures on the country. But this does not mean that most Greeks no longer wish to be part of the eurozone. Polls suggest that the majority of the population wants to remain within the single currency bloc and continue to receive the benefits that come with it. In essence, that is what the January election may boil down too–a vote to stay in the eurozone or not. At least that is what Antonis Samaras, leader of the New Democracy party, would the contest to be about.

Opinion polls suggest that Syriza will be the largest party after the election and it will therefore receive a 50-seat bonus in parliament. However, the party would still not have enough seats for an outright majority according to current polling and would therefore need to form a coalition. For a sustainable coalition to be formed Syriza’s leader, Alexis Tsipras, may have to take a more centrist attitude towards the Troika. This may explain why his rhetoric has become less aggressive in recent months.

Nothing is certain, however, and the final vote in the election will likely be close. The gap between Syriza and New Democracy in the polls is narrowing and could close further. The return of former prime minister Georgios Papandreou to the political scene with his new party, the Movement of Democratic Socialists, may steal votes from either party—further narrowing Syriza’s lead. But the bigger unknown is the high number of undecided voters–somewhere between 7%-16%–who have a tendency to vote for the status quo on election day.  The potential for a second election should not be ruled out if neither side is able to achieve a stable coalition.

The political developments in Greece will create uncertainty in markets given Syriza’s views on austerity and the chance that a Syriza-led government will not honour the terms of the bailout. If Tsipras does win, the first month in office maybe his toughest. The bailout was due to end in December but was extended by two months and means he would just have one month to successfully renegotiate Greece’s position. However, pressure from both the Troika and the markets would mean that decisions would need to be taken very quickly and the period of uncertainty could be short lived.

For the eurozone as a whole the uncertainty is unlikely to create the same financial stresses as a few years ago, but politics are going to play a big part in the European investment landscape in 2015.

contagion points

 

Kerry Craig is global market strategist at  JP Morgan Asset Management

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