Before this year’s rounds of voting, I doubt anyone outside of Greece, Cyprus, and maybe Turkey, gave two hoots about who won the Greek elections.
Now they do. Today the Greek election results are front-page news in Britain. You can probably say the same for most of the world’s press.
Meanwhile, markets soared this morning with a sense of relief that the Greek people haven’t just decided to throw caution to the winds and not pay their bills.
Now a tiny country, irrelevant in the global context if you’re purely looking at GDP, can see that it holds the fate of the global markets in its hands.
Ironically enough, it was the Greeks who first articulated the principle of leverage. If I was a Greek voter – or an Irish or a Portuguese one – I’d be looking at that leverage and wondering what concessions my government could wring out of it.
So anyone who thinks that it’s going to be smooth sailing for Europe from here is very much mistaken…
Greece has bought some time, for now
The New Democracy party managed to beat the left-wing Syriza party in yesterday’s Greek election. New Democracy will still need to form a coalition in order to form a government, but it’s a much more decisive result than the last one.
Markets are pleased. To make something clear, no major party in this race was anti-euro: this was not, technically, a referendum on whether or not Greece left the euro.
However, Syriza had very firmly said that it was against the whole deal attached to the Greek bail-out. It was effectively calling for Greece to default on its debts, but stay within the euro.
Telling the rest of the eurozone where to shove their bail-out, then hoping to remain as part of the club was always an optimistic idea. So if Syriza had won, a break-up – or some very difficult conversations at least – would have been on the cards.
Hence this morning’s relief at New Democracy’s win. Antonis Samaras, the leader of New Democracy, says there will be “no more adventures; Greece’s place in Europe will not be put in doubt”.
Yes, there are plenty of talks to be endured. There might be some huffing and puffing and grandstanding from both sides, as a New Democracy-led coalition (assuming there is one) tries to renegotiate the terms of the bail-out deal.
But the fact is, Greece now has a pretty strong hand to play at the negotiating table. You can bet that every European leader had their heart in their mouth this weekend, and is sighing with relief that the Greeks opted to back the bail-out.
The Greek people have said that they’re willing to stay the current course. As a result, the rest of Europe – the Germans, in other words – can give a little ground on the precise details without losing face.
And as Joshua Chaffin points out in the FT this morning, “also working in the Greeks’ favour is that while many of its eurozone partners now wish it were outside the single currency club, no one wants to be seen giving it the final shove”.
A more united Europe is the path of least resistance
If the Greek election reveals anything, it’s that there still isn’t enough appetite for ejecting troublesome eurozone members from the club; and that strengthens the hand of the anti-austerity brigade even further. If you can’t throw a country out for not complying with the rules, then you have no real sanctions to apply.
More to the point, Italy and Spain remain vulnerable to shifting sentiment. Even if the rest of Europe was prepared to let Greece go, those two are far too important to even consider it. And Spain remains in trouble – the ten-year bond yield went above 7% again this morning, as everyone remembered that the Greek election has almost no impact, positive or negative, on Spain’s financial condition.
So the path of least resistance from here – which is the path that politicians are bound to take – seems to be to head towards a more united Europe. Regardless of what your feelings are about that politically, it’s the one thing that Germans and Greeks can broadly agree on (for now).
What does this mean for investors?
Panics will continue. There’s no doubt about that. Until the eurozone banking system has a reliable lender of last resort, there’s always going to be the risk of a default and collapse from an individual country.
With the Spanish bond yield remaining high, the G20 can’t just come out of its meeting today and tomorrow with a bland reassurance to keep an eye on things. The ‘co-ordinated action’ from central banks that tends to get markets so excited may still be needed.
However, as we’ve pointed out already, several European markets now look cheap. Have they seen their lows? Possibly. Some of the southern European markets have been pricing in a rapid exit from the euro for Greece. That looks less likely to happen now.
Even if they haven’t, I suspect that you won’t regret drip-feeding some money into the cheaper European markets at these levels. We looked at how to do this in a recent issue of MoneyWeek magazine: Why it’s time to pile into Italian stocks. If you’re not already a subscriber, you can read it now by subscribe to MoneyWeek magazine.
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