Asset managers calm over risk of contagion from Greek election
European asset managers have remained calm in the face of a potentially unstable Greek election result as the new party aims to renegotiate bailout terms.
Yesterday, the left-of-centre and anti-austerity party Syriza won 149 seats in Greece’s 300-seat Parliament, falling just short of being able to form a majority government.
Syriza, led by Alexis Tsipras, has now formed a coalition government with the Independent Greek party after it won 17 seats, with renegotiations with the Troika – the name given to the European Central Bank (ECB), International Monetary Fund (IMF) and European Commission (EC) – at the top of its agenda.
The negotiations relate to restructuring the debt from Troika bailouts of the Greek government and banks, thereby allowing the government to scale back unpopular austerity measures.
Greek GDP has fallen by more than 30% since the onset of the financial crisis, with equity markets falling 90% since 2007.
Fidelity head of European equities, Paras Anand said Tsipras was likely to restructure the debt agreements to free the Greek economy from a “seemingly endless period of contraction.”
He said much would be made of the threat to euro-zone stability from the left-leaning party’s plans, but that he expected the impact to be modest.
“Syriza has repeatedly stated a desire to remain within the single currency,” he said.
“The emphasis of key creditors within the euro-zone has already shifted from austerity to reform, and Syriza may find greater support from the mainstream European parties than its ‘radical’ tag would suggest.”
Anand also said the risk of contagion to other euro-zone economies was limited given the uniqueness of the Greek situation and the tightening of yields across the euro-zone.
Data from Bloomberg showed the yield on 10-year government bonds has risen since the election result, from 8.39% to 8.72%, but was still lower than the 10.68% seen earlier this month, a 15-month high.
However, contagion risk in Spain and Italy seems limited, with yields continuing to trade much lower in the wake of the ECB’s quantitative easing announcement.
Spanish 10-year government bonds are trading at 1.36%, falling from 1.53% since the ECB action, and more than half the yield from 12 months previous.
Italy’s 10-year bonds paint a similar picture.
“It is worth taking a step back and reflecting that the financial sector across Europe is in a significantly more robust position today than it was at the last ‘peak’ of the sovereign crisis in 2011,” Anand added.
Meanwhile, Rob Burnett, investment director at Neptune’s European opportunities fund, argued that Syriza had no incentive to cause further turmoil in Greece.
“Tspiras is taking power, with Greece having just registered its first quarter of GDP growth in seven years, and he is aware he has a tremendous opportunity to gather the plaudits as the economy recovers,” he said.
“We expect Syriza’s negotiation with the Troika, comprising the ECB, the European Commission and the International Monetary Fund, will be difficult, but all sides are incentivised to come up with a face-saving compromise.”
Viktor Nossek, research director at WisdomTree, said QE was likely to protect Spain and Italy from contagion, and preclude fiscal easing in these countries and Greece.
“A compromise struck between the Troika and Greece is [also] likely to stabilise the euro as it dissipates contagion risk to Italy and Spain,” he said.
“Nevertheless, a compromise should impact sentiment in Greece’s bond markets negatively.
“Pressure on Greece’s bonds to fall further is likely. At risk, too, are Greek bank stocks that hold government debt of Greece.”