After three weeks of fractious political wrangling, Greek politicians were unable to reach an agreement in the third and final parliamentary vote on electing a new Greek president. This means that a snap general election must be held, which opens the door for Syriza, a virulently anti-austerity party, to come to power. Greek assets reacted poorly to the news, with the Athens stock exchange falling 11% on the day closing at a two-year low and the 10-year Greek government bonds yields jumping 106 basis points (bps) to 9.3% their highest point in over 12 months.
The deteriorating political situation in Greece brings back memories of 2012, when snap elections almost allowed Syriza to gain power. At that time, the eurozone’s financial crisis was still raging, and the fear was that the wrong result in Greece would be seriously destabilising to the single currency area as a whole. As we discuss below, we do not think that the current situation is a repeat of 2012. The improvement in the economic and investment environment in Europe over the past two years makes a Greek default or exit from the eurozone less likely than it was two years ago, and probably less damaging to the broader stability of the region, even if it happened. But the situation in Greece is a reminder of the political damage that Europe’s very slow economic recovery has inflicted on mainstream parties nearly everywhere. Investors should be keeping a close eye on these political pressures as we go into 2015—particularly in Spain.
Syriza has a good chance of victory, but it might not enjoy it for very long The latest opinion polls show Syriza in the lead, with the support of around 30% of the Greek electorate. Its popularity has slipped a little in recent weeks, but in the absence of a late surge of support for the governing party, there is at least an even chance that this hard-line eurosceptic party will form part of the new Greek government.
Syriza was founded in 2012 in response to tough austerity measures being implemented on the economy as part of the bailout programme agreed with the “Troika” – comprised of the European Commission, European Central Bank (ECB) and the IMF. Many of the positions Syriza initially took were impractical and disruptive, but it has since evolved and matured as a party and the rhetoric of its leaders is more conciliatory. They no longer call for Greece to leave the euro. Instead they say they want to work with the international community to re-negotiate Greece’s bailout agreement and write off around one-third of Greek debt.
