In the first few days of the Syriza-led government, investors began to fear the worst. Headlines flew around, allegedly originating from Syriza, which suggested an extremely hard bargaining line was to be taken against the Troika. Peripheral yields suffered and comparisons were drawn with previous Greek crises. A few days later and calm is largely restored.
Surprisingly sensible and informed rhetoric from Syriza has allayed concerns. Indeed, perhaps it should not be too surprising. Syriza campaigned on an anti-austerity, not anti-euro, basis. Furthermore, the Greek population overwhelming want to remain in the Euro.
We all know that Greece’s debt-to-GDP ratio exceeds 170%, far higher than other peripheral countries. There’s been wide-agreement that Greece is insolvent for years. So what’s different this time?
The government want to do something about it. It’s what the electorate want, and it’s what the economy needs. What has to happen now?
It is likely that these issues are discussed and agreed upon in the next few weeks. That is necessary to ensure limited contagion to other peripheral countries which could arise with any approaching repayments. Wider afield, there are risks that agreements reached with Greece may be sought by Spain, for example, where the Podemos party is seeking to use Syriza’s momentum to their own advantage in elections later this year. The Troika will be especially careful about this matter but that isn’t the immediate focus.
What does all this mean for the market?
Investors have Greece in one eye, Spain in the other. Any flare-up concerns about the former can easily spread to the wider periphery. Ultimately we expect the weight of ECB QE to lead to lower peripheral yields by year end, but we acknowledge the possibility of some volatility before then.
Let’s hope that markets don’t slip up on a little bit of grease.