With the uncertainty over eurozone quantitative easing (QE) behind us, all eyes are now on tomorrow’s Greek elections – which the left-wing, anti-austerity Syriza party looks likely to win.
Syriza has been making extraordinary promises to the electorate, including free electricity to those who have been cut off, and a plan to give every public sector worker who has been sacked their job back.
Leader Alexis Tsipras has also pledged to convince the rest of Europe to write down Greek debt – now totalling 175% of GDP – so that he can boost public spending and growth. Yet, he has also vowed to remain in the euro.
On the face of it, he is going to be very hard pushed to deliver an end to austerity measures. One of the rules attached to the European Central Bank’s (ECB) big quantitative easing (QE) programme is that there will be a limit of 33% on the amount of a country’s bonds that can be purchased. But the euro system is already groaning under the weight of Greek debt, which means the country will be ineligible for inclusion in the programme until at least July.
The ECB is also demanding that a stalled review of Greece’s current bailout is completed before it can participate in the programme. Clearly, ECB boss Mario Draghi is keen to ensure that whoever wins tomorrow is in no doubt that as far as they ECB is concerned, Greece cannot wriggle out of its commitment to creditors.
Member states also seem to be in no mood for compromise. Finland’s prime minister, Alexander Stubb, for instance, says the Greek people needed to know that it will be “very hard for us to forgive any loans or restructure any debt at this moment”.
Stubb suggests Greece faces three choices: to continue as things are; to endure a “continued period of instability”, while discussing extensions to its existing borrowings; or a “dirty exit” from the eurozone.
It’s difficult to argue with Stubb’s scenarios. But what does it all mean for investors? As Moneyweek editor John Stepek pointed out earlier this month, Greece itself is, and will remain for a considerable time, a high-risk punt no matter what the result of the election.
At the extremes, if it leaves the eurozone, investors with exposure to the country will see capital controls imposed and could lose a lot of money. Alternatively, if it manages to stay in the euro, and convincingly so, investors might see a massive rebound and make a lot of money. And indeed, the existence of QE might make that more likely now.
But even if you don’t fancy a punt on Greece, if you’ve been keeping an eye out for opportunities to buy into other eurozone markets, the launch of QE by the ECB is great news, particularly as valuations for eurozone companies are much more attractive than for US stocks. Take a look at the latest cover story in MoneyWeek magazine for more on the best stocks to buy. If you’re not already a subscriber, get your first EIGHT issues free here.