Fears of financial contagion in Europe are flaring ahead of elections in Greece later this month that some observers think could lead to the country quitting the currency union.
Heightening those concerns is the significant popular support behind Syriza, a left-wing party that opposes many of the bailout terms imposed on Greece by the European Commission, European Central Bank and International Monetary Fund, or "troika."
A victory by Syriza at the polls has led to speculation that Greece could decide to exit the eurozone — dubbed a "Grexit" — rather than continue submitting to the troika's loan terms. Such austerity has pushed unemployment to more than 25 percent, caused poverty to soar and prompted a wave of violent protests.
"One should not underestimate the mental depression suffered by many Greeks during the past five years of economic depression and its impact on the rationality and the measured judgment of voters, nor the impact of misinformation coming from populist media dominated by special interests keen to see the return of the drachma and an end to their financial obligations," wrote Theodore Pelagidis, a non-resident senior fellow at the Brookings Institution, in a blog post. "Syriza is a consequence of the depression and of the serious flaws of the type of austerity policies implemented both by a stubborn and inflexible troika and an unreformed, incompetent political system in Greece."
Pelgidis is no fan of Syriza's economic policies, arguing that the party's plan to get debtholders to take a "haircut" on their investments and reverse privatization policies is unrealistic because about 8 billion euros in debt is set to mature.
Even so, many investors are taking Syriza's potential victory seriously. The euro fell Monday to a 9-year low against the dollar, t0 $1.1864, largely reflecting worries that Greece leaving the currency block could trigger a financial crisis in Italy, Spain and other weak European economies. Stocks also plunged in the U.S., with investors seemingly spooked by the prospect of deepening economic turmoil in Europe and slowing global growth.
Despite those concerns, some experts say the fears of a new Greek crisis are overblown.
Syriza is not certain to win the January 25 election, with some suggestions that the party's support is slipping. And even if Syriza does prevail, party leader Alexis Tsipras "has reassured investors that he will not seek to leave the currency union and would renegotiate, rather than tear up, Greece's bail-out conditions," said Jonathan Loynes, chief European economist with Capital Economics, in a note.
In addition, the world has changed dramatically in the years since the meltdown in the Greek economy sent shockwaves around the world. For instance, though Greek public debt stands at about 175 percent of GDP, artificially lowered interest rates, along with other financial help such as extended maturities and grace "interest payment years," are expected to ease the country's burden. Unlike the previous economics crisis, meanwhile, European banks now have little zero exposure to Greek bonds.
Vassilis Monastiriotis of the London School of Economics told CBS MoneyWatch that the odds of Greece leaving the eurozone are "zero" given the severe economic consequences that would follow, particularly if the exit is sudden and not done in coordination with the troika and other official institutions.
"[T]he impact could be devastating, as the devaluation will be huge and the government will not be able to service its euro-denominated debt," he said in an email. "It will naturally default, which will mean that they will have to run balanced budgets for many years to come. But with the private banking sector also excluded from international financial markets, it is difficult to see how this could be achieved."
More broadly, Greece's election could force European countries to reconsider its economic path, which since the 2008 financial crisis has focused on slashing government debt, raising taxes and similar austerity measures. That could worsen political conflict with Germany.
Europe's largest economy is "skeptical at best and resistant at worst to any course of that kind," said Miles Kahler, a professor at the American University School of International Service.