Greece is back on the front pages of the financial press. Why is a country whose GDP is a rounding error in the $75 trillion global economy making headlines? Even at 175% of GDP, Greece’s outstanding government debt is about one-half of one percent of the world’s total.
Greece made its way back into the headlines when its parliament failed to elect a new President in December, which resulted in snap elections. The snap elections were held on January 25th and the victor was the left-wing anti-austerity party Syriza, led by Alexis Tsipras (pronounced sipras).
Tsipras campaigned on a promise to renegotiate the terms of Greece’s bailout with its creditors, the so-called “Troika” of the IMF, European Central Bank, and the European Commission. Tsipras doesn’t like the painful austerity measures and structural reforms that were prescribed by the Troika as conditions of the bailout. The Troika so far hasn’t signaled a willingness to renegotiate the terms of Greece’s bailout.
The stand-off has investors concerned that if a compromise can’t be reached, Greece will be forced out of the euro-area, causing both government and private sector debt defaults.
Since the elections, investors have been on edge over Greece. Every positive headline on Greece sends stocks higher while every negative headline sends stocks lower. With only EUR 315 billion in debt, much of which is owned by the Troika (90% according to Morgan Stanley) aren’t investors making a mountain out of a molehill?
Greece in and of itself isn’t really the concern. The concerns is with the potential knock-on effects of the Troika either forcing Greece out of the euro-area or agreeing to the country’s demands to ease the austerity and structural reforms. On the one hand, if the Troika renegotiates the terms of Greece’s bailout, it sends a signal to other troubled euro-area members that the terms of their bailouts are up for negotiation. Greece may be insignificant in the overall scheme of things, but Spain isn’t and Italy most definitely is not.
On the other hand, if Greece is forced out of the euro-area, it sends a signal to investors that the euro-area isn’t a permanent currency union. Risk will have to be priced accordingly which could have serious economic and financial implications. One could envision a scenario where markets start betting on the next domino to fall, which could result in a self-fulfilling prophecy.
How is the situation resolved? The best case scenario for markets would be for Syriza to back down. Short of that, a symbolic concession by the Troika that has no material effects would seem to be the next best outcome and probably the most likely. Stay tuned here as heightened volatility could present compelling opportunities for long-term investors.
Jeremy Jones, CFA
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