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Greek Election Preview

06/15/2012

This Sunday, June 17, close to 10 million Greek voters will once again vote in an attempt to form a coalition government. The first attempt on May 6 failed to achieve that goal. Constitutionally, a third vote is possible, although unlikely. This election by the world’s first democracy has been characterized as a vote on whether the Greek electorate wants to remain in the euro. Keep in mind, the overwhelming majority of the Greek population do not want to exit the euro.
 
I have expressed my expectation in previous blogs that I do not expect the initial reaction of this vote to be an immediate removal of Greece from the euro. The ultimate outcome (multiple months from now) may provide that opportunity, but not now.   
 
The polls close at 7 p.m. Sunday night, with the first official results due two to three hours later. For us New Yorkers, we certainly will be checking our market updates on Sunday afternoon. 
 
The parties running in the election are the Syriza, New Democracy, and Pasok. In the May 6 election, the Syriza won 16.8% and the New Democracy won 18.9% of the popular vote, while the Pasok was a distant third. 
 
The problem for the capital markets would be an unlikely victory by the Syriza, which has expressed it will not adhere to the terms of the bailout with the Troika. However, recent interviews and literature from Syriza leader Alexis Tsipras seems to have alienated or scared some of the voting electorate as the charts below depict (Figure 1.1).
 
Probabilities of each party winning the largest percentage of popular vote (as of Friday, June 15)
•  New Democracy: 70%
•  Syriza:  27%
•  Pasok: 0.5%
 
While the New Democracy seems positioned to win the largest percentage of the popular vote, investors should be prepared for turbulence in the formation of a coalition government, with a low probability for that outcome. I expect post Sunday the domestic battle to form a coalition government continues but with more of a determined emphasis on forming a coalition government and avoiding a third election.   
 
For the capital markets, what will be needed is coordination among global central bankers to provide continued liquidity to banks and messages of fiscal unity both globally and within Europe.
 
European finance ministers will be together in Mexico at the G-20 summit, which should be helpful in distributing a strong unified monetary message. I do not expect central bankers to fall short in any attempt to flood the banking system with the necessary liquidity post Greek elections.
 
In term of fiscal unity, the Friday, June 22 Rome meeting between Italy’s Monti, Spain’s Rajoy, France’s Hollande, and Germany’s Merkel seems likely to be the event that determines the path of European fiscal unity. The recent message from the price action in the German bund (Figure 1.2) suggests that Germany will compromise and move more toward sharing the debt burden with its euro partners. The German bund has mysteriously lost its bid in recent weeks, I suspect that is because bond traders now view that European safe haven as having become part of a pan-euro debt pool.     
 





 

 Figure 1.2 German 10-Year Government Bond, March 15, 2012 to June 14, 2012

Source:  Bloomberg

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