Greek elections: Eurozone dodges a bullet, says SIG’s Watson

Rupert Watson, head of Asset Allocation at Skandia Investment Group, warns that the European debt crisis still has a considerable way to run.

New Democracy won the most votes in the Greek election at the weekend and is likely to able to form a new coalition government. As soon as that is agreed the Troika will once again descend on Athens in an attempt to reach agreement on modifying the recently agreed bailout deal, where Greece is already behind schedule.

Eurozone leaders are likely to agree to give Greece more time to reach the deficit targets and may also agree further measures to boost the economy – or at least slow its descent.

That, of course, is the easy bit. The restructuring of the economy is a huge challenge, given the weakness in the economy, political instability and the domestic special interests pushing their own narrow agenda. A further default on Greek debt remains likely (this time on public rather than private sector debt), although this may not happen for a number of years.

While Greece will remain in the spotlight over the next few months, the focus will shift to policy makers as they attempt to boost their economies. We expect the ECB to cut interest rates in July and either start buying bonds again (SMP) or launch another long term refinancing operation (LTRO) if Spanish and Italian bond yields fail to rally. We also expect the Fed to provide more monetary stimulus and for the Chinese to cut interest rates. Finally, the Bank of England could announce a new round of quantitative easing.

This stimulus along with weaker food and energy prices should support the global economy and global financing markets over the next few months. However, the European debt crisis still has a lot longer to run and the Greek election result is a bullet dodged rather than a step to bring the crisis to a close.

 

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