Greek election outcome – what the analysts say

While the European Central Bank’s QE missile has hogged the headlines over the last 24 hours, the next major eurozone event – the Greek elections – is just around the corner.

So far investors appear to be relaxed about the outcome, with the Athens Stock Exchange currently heading towards its best one-day performance since last October and bond yields falling sharply for a second day.

But will the radical anti-austerity party Syriza, which is leading in the opinion polls, have to form a coalition? And is a much-feared “Grexit” still on the cards? Here is what leading strategists are saying:

- Advertisement -

Coalition or no coalition?

Mujtaba Rahman of the Eurasia Group believes there is 60 per cent chance Syriza will win power on Sunday through a coalition.

He notes that ANEL and To Potami, a moderate centre-left party, are the “two most likely coalition partners following Sunday’s vote”.

What will Syriza do?

There has been a lot of hard talk from the radical left party but Alberto Gallo of Royal Bank of Scotland doesn’t believe there will be a Grexit. Instead he talks of a “soft restructuring” of Greece’s debts. He says:

Syriza wants a haircut on official sector debt (OSI) but not a euro exit. The European Commission opposes OSI, favouring soft restructuring: interest rate reduction and maturity extension.

We expect a soft restructuring at first. This would not restore sustainability, unless it is in the International Monetary Fund’s goldilocks-growth scenario (3.5 per cent growth until 2019), which is unrealistic. A Syriza-led government could push for an OSI haircut later on.

Perhaps unsurprisingly, the euro-sceptic Bruges Group argues strongly that “Greece will be better-off outside the euro, austerity and European Union/European Central Bank control”. Robert Oulds, director of the Bruges Group, says:

Despite the belated bond buying by the ECB, which does not apply to Greece, it is too late for the eurozone.

The euro, underpinned by austerity, has already failed. On Sunday the Greek people should not be afraid of making bold decisions.

- Advertisement -

But how concerned should investors be?

UBS strategists Justin Knight and Andrew Lilley argue that the Greek bond market is over-pricing political risk in Greece. They write:

We think long-term Greek bonds at 13 per cent below their March-September 2014 median are too cheap.

Markets seem worried about both euro exit and electoral fragmentation

We think that the probability of euro exit occurring over the medium term is extremely low, as would be the probability of another Greek debt restructuring within the euro area.

In addition, we believe that a coalition government forming after this election would lessen the likelihood of euro exit, not increase it. Based on opinion polls, the most likely outcome is a Syriza-led coalition

We think this would be good for Greek bonds. Indeed, Greek bonds appear cheap even in the case of the “worst” outcome for markets.

Timo del Carpio and James Ashley at RBC Capital Markets are more anxious. Even a “benign” scenario – in other words an agreement that avoids Greece defaulting on its debts and a Grexit – could still have “ramifications for the economic and political outlook for the rest of the euro area”. They add:

We think this particular risk is underappreciated.