Whatever happens in Greece over the weekend, Monday is shaping up as one of the more interesting days for global stock markets in recent years.
Investors the world over are waiting anxiously for the results of Greek elections that could determine whether the debt-addled nation remains in the 17-member eurozone.
A win for the status quo New Democracy party would likely offer hope that a Greek bailout approved by European fiscal leaders earlier this year will move ahead as planned with as little disruption as possible. Investors are expected to seize on that scenario as a sign that there’s light at the end of the long European debt crisis tunnel. That optimism could fuel a surge in global markets.
Investors have been bracing for a much more ominous outcome, however. Polls ahead of Sunday’s ballot, made necessary by inconclusive national elections held in May, show rising support for the far-left leaning coalition party Syriza, whose leaders have renounced the austerity measures required under the terms of the Greek bailout.
“Next week will see market direction steered initially by the results of the Greek election, in which there is a strong risk that the anti-austerity Syriza coalition could win power,” said Chris Williamson, chief economist at research firm Markit.
Should Syriza leader Alexis Tsipras stand by his campaign pledges and reject existing bailout terms it’s widely assumed that Europe would cut off funding to Athens, leading to a messy default by Greece on its debts and ultimately forcing the country out of the eurozone.
“I think the markets will initially react positively to austerity crowd, and negatively to the anti-austerity crowd, but that in either case, Europe will express a willingness to work with Greece to change terms.”
- Peter Tchir, with TF Market Advisors.
Given that chaotic economic forecast, fears have emerged of a run on Greek banks Monday should the anti-austerity party win over the weekend.
A default and expulsion from the eurozone would have a catastrophic domino effect on other fragile southern European economies such as Italy, Spain and Portugal, the thinking goes. Consequently, a win by the anti-austerity Syriza party in on Sunday is widely expected to have a devastating impact on global markets on Monday.
Analysts at Societe Generale, the second largest French bank, said earlier this week in a research note that an “exit would be economically ruinous for Greece.” Moreover, the SG analysts believes Greece’s economy could collapse by half if an exit occurs and that the resulting contagion would prove a swift and severe blow to Europe’s already-fragile financial system.
"For the Eurozone, any Greek exit would have a negative impact, but more than that, it would dramatically reduce the time available to sort out the shambolic architecture that is threatening the system," the analysts said.
Shambolic, indeed. Greece’s economy is in a shambles and it’s dragging down the rest of Europe with it. Data released on Thursday shows that Greek unemployment soared to a record high of 22.6% in the first quarter of 2012, about twice the rate across the rest of Europe.
A Willingness to Compromise Either Way
Austerity measures already implemented under the terms of an earlier Greek bailout forced large cutbacks in public employee payrolls and left thousands of Greece out of work. In addition, public employees still on the job have seen their wages cut and retirees have seen their pensions scaled back.
Greece’s economy, already stagnating ahead of austerity, is now virtually in free fall.
Young people in Greece have been hardest hit with unemployment among working age people under the age of 25 at a staggering 53%. Not surprisingly, many of these out-of-work young voters are looking for a change in political direction and now support Syriza.
Late in the week, as the Sunday elections approached, a third possibility emerged beyond the status quo optimism provided by a win by the pro-austerity New Democracy party or the projected chaos predicted by a Syriza win.
There is growing sentiment that European fiscal leaders, led by German Chancellor Angela Merkel and the heads of the so-called troika, the European Union, the European Central Bank and the International Monetary Fund, will seek to negotiate with whoever wins on Sunday.
“I think the markets will initially react positively to austerity crowd, and negatively to the anti-austerity crowd, but that in either case, Europe will express a willingness to work with Greece to change terms,” said Peter Tchir, with TF Market Advisors.
The stakes are too high for European fiscal leaders to refuse to work with the eventual winners and several Greek politicians have apparently hinted that conversations have already taken place to that effect.
Reuters on Thursday reported a similar scenario shaping up as the election approached.
“Now that Germany and others started looking at how to manage a Greek exit, they have realized some scenarios are pretty disastrous and will go out of their way now to avoid those. There is just too much risk -- that it quickly spreads to Spain and Italy, especially if the ECB has to take massive write-downs,” said Tchir.
Ultimately, if Europe is willing to renegotiate terms of the Greece bailout in order to avoid a messy Greek exit, the elections Sunday could be a “non-event” over the long-term but a market-moving catalyst for a couple of days.
Tchir said European leaders are likely to start signaling their willingness to negotiate as the elections nears in an effort to quell fears and stabilize financial markets.