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Greek renegotiation to increase risk of 'moral hazard', says ING

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  • Greek renegotiation to increase risk of 'moral hazard', says ING

EUROPE - Market commentators have given a cautious welcome to Greece's election result, noting that it would reduce the "near-term" risk of the country exiting the single currency - with markets briefly rallying on the news.

It follows from yesterday's re-run of the parliamentary elections, with conservative party New Democracy able to increase its voter share markedly over May's poll, gaining support from nearly 30% of the electorate.

Predicting market reactions, which saw a slight rally this morning followed by the FTSE 100 down around 80 points over opening at time of writing, Barry Norris, partner at Argonaut Capital Partners, said: "After initial relief, markets are likely to remain in wait-and-see mode and are likely to realise this Greek election result is unlikely to be a significant turning point."

Similar point losses were seen among the Dax-listed companies, with the CAC 40 down 59 points over opening at 3pm CET.

Norris pointed to blue-chip companies with strong balance sheets as the "stand-out" investment, remaining cautious of banks domiciled in within the single currency.

However, commentators also noted that the terms of the bailout package might prove to be too restrictive, arguing that if the EU and IMF did not relax their conditions, any newly formed government might not survive - increasing turbulence once more.

ING Investment Management fixed income strategist Valentijn van Nieuwenhuijzen outlined the problems inherent in relaxing bailout terms: "On the one hand, Greece must be given a chance to reform without killing its growth prospects further. An added advantage of this is that by reducing the risk of Grexit it will also diminish contagion."

However, he stressed that, with renegotiation looming, it could increase the "risk of moral hazard".

"This raises the risk of EMU turning into a transfer union where the very act of providing funding to the periphery impedes the necessary reforms," he said. "Some mechanism must thus remain present to keep the pressure on Greece."

Willem Sels, UK head of investment strategy at the private banking arm of HSBC, was similarly cautious, predicting that the euro-zone resolution would not be found and that the governments would continue to "muddle through".

Kames Capital fixed income manager Sandra Holdsworth was not as positive as Sels, lamenting that European politicians appeared "impotent" and unable to agree timetables towards a solution.

"The sticking-plaster solutions of the EFSF [European Financial Stability Facility], the ESM [European Stability Mechanism] are not enough, especially now that Spain appears doomed to a full bailout," she said.

"Only a move or even a sniff of a willingness of a move towards a fiscal union will encourage investors back into problem countries on a long-term horizon."

Sels, citing investments with an asymmetric return profile as potential options, said: "With so much uncertainty, we look for trades that would do well in our main muddle-through scenario, but not suffer too much in alternative scenarios."

He added that this would involve underweighting any safe-haven bonds due to their already low - and, in some cases, still falling - bond yields, instead looking towards inflation-linked sovereign paper that "should outperform fixed-rate bonds, especially in Germany".

He also cited export-focused European countries outside the financial sector that had previously been "unduly penalised" and were therefore now attractively valued.

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