It was the last thing the markets wanted for Christmas: a snap Greek election.
After the country’s parliament failed to elect a new president, the country is set to go to the polls at the end of January. The radical Syriza party is well ahead, and may well take power on a platform of restructuring Greece’s debts and overturning austerity.
Not very surprisingly, Greek stocks and bonds plunged on the news, falling by 11% on Monday as the news broke. Yields on Greek debt surged. As the New Year begins, Greece and other high-risk markets such as Spain will inevitably be volatile.
And yet, in reality, the elections may well be a great buying opportunity for investors with strong nerves. There are two reasons. When it comes to the crunch, the rest of the eurozone nations will strike a compromise with the Greeks, and forgive much of its debt. And, oddly enough, the policies of the so-called far left are, in this instance, perfectly sensible. With an easing of the crushing austerity program imposed on the country by the European Union and the International Monetary Fund, Greece could start to grow again, and its burnt-out stocks might well sore in value.
There are no shortage of reasons for investors to feel nervous about the Greek election at the end of the month. The country has been through a catastrophic economic collapse, with output now a massive 25% below its peak. (For a comparison, the U.S. economy shrank by 33% from peak to trough in the Great Depression.) The unemployment rate has soared to 25%, and for young people it is more than 50%. Wages have been cut drastically, and so has government spending. Although the economy has started to eke out some modest growth, that is largely the result of lower wages helping its tourist industry, and lots of poorly paid jobs waiting on tables for foreigners is hardly a great basis for an economy.
Not surprisingly, Greeks have lost faith in the mainstream parties that landed them in this mess. The radical Syriza, led by the charismatic Alexis Tsipras, has surged in the polls, and is now ahead of the governing right-of-center New Democracy. There is a very real chance that it will emerge as the largest party in the election. The party is committed to ending the austerity program imposed on the country as part of the EU-IMF bailout package. If it does so, and the EU refuses to stump up more money, Greece will bust and may be forced to leave the single currency. In those circumstances, it is hardly surprising that investors are dumping Greek equities and bonds.
Even worse, if Greece revolts against austerity, that may spread to other peripheral countries. Spain will have an election in 2015, and Podemos, a party similar to Syriza, is surging in the polls there as well. Very quickly, the eurozone could be plunged back into a full-blown crisis. Expect a month of volatile trading, with every opinion poll showing Tsipras in the lead followed by another plunge in the markets.
And yet, in reality, the markets have got this one wrong. Whatever happens, it can only be good for Greek equities, which are already some of the cheapest in the world. Here’s why.
Start by assuming that Tsipras is prime minister by February, and committed to renegotiating Greece’s debts. What happens then? There will be a lot of bluster, especially from Berlin and Frankfurt, about how it is impossible to bail out irresponsible countries within the single currency. The familiar stories of Greek waste and corruption will be wheeled out.
But when it comes to the crunch, the other countries will negotiate. Greece’s total debts come to around 300 billion euros. Set within the context of the total eurozone, with a combined GDP of almost 10 trillion euros, this is a relatively small sum. And it is not even as if the whole amount has to be written off. If you forgave a third of it — say, 100 billion euros — and postponed the interest on the rest for five years, that would be a deal that Tsipras could no doubt live with. For 80 billion euros, it is simply not worth the risks of a Greek exit from the euro or a debt default. It will be better to simply cut a deal.
Syriza may be made up of wild-eyed radicals. But the truth is, its economic platform is far more sensible than the platitudes of the EU and the IMF. Greek debt now totals 174% of GDP. It is never going to be able to pay that off, and there is no point in pretending it will. Companies restructure their debts all the time. So do countries. It is not as if a policy that had led to a 25% drop in GDP and 50% youth unemployment can be described as a great success. With a reduction in its debts, and a modest boost to government spending, Greece should start to grow at a respectable rate again.
There is, of course, another plausible scenario. The center-right may well be able to assemble a coalition and scare enough voters into accepting the status quo, thereby managing to secure a narrow victory in the election. If that happens, there will be an immediate relief rally in the stock and bond markets.
Either way, the market should go up. Greek assets are cheap. From a high of 5,300 back in 2007, the Athens Composite Index has slumped all the way down to less than 850, a drop of over 80%. Even Russian shares look good by comparison. Company profits have been squeezed relentlessly by the collapse of the economy. And the threat of political turmoil has stopped foreign investors from moving in. They may well get cheaper still as the election date draws closer — and yet, for brave investors, they may already be a bargain.
