Chances of a Greek exit from euro rated at 50/1
City Index January 27, 2015 6:42 PM
<p>The victory of the Syriza Party – commonly referred to as the ‘anti-austerity’ party – in last weekend’s Greek election has led to the inevitable […]</p>
The victory of the Syriza Party – commonly referred to as the ‘anti-austerity’ party – in last weekend’s Greek election has led to the inevitable resurfacing of Grexit fears (a Greek exit from the European Union).
In reality, I think the chances of this happening, whilst certainly being possible, are slim. I make the odds of a Grexit about 50/1 right now and in this article, I will explain the reasons why.
Syriza won 149 seats, including an extra 50 for winning the most seats, which combined with the Independent Greeks 13 seats gives the new coalition an outright control of 162 seats (151 needed for majority). The main ideology that unites the far left (Syriza) with the far right (Independent Greeks) in a previously unfathomable coalition is the issue of austerity and the conditions attached to Greece’s €245bn bailout.
Both Alexis Tsipras, Greece’s new Prime Minister and leader of the Syriza party, and Panos Kammenos, leader of the Independent Greeks party, agree that Greece should abandon austerity and seek a new deal with the EU to write-off its debt. But key to these two points is the fact they both want to achieve this without leaving the Eurozone.
The market reaction to this unlikely coalition was much warmer than that which would have met an outright majority for Syriza. Were Syriza to hold a majority on its own, then it could do as it pleased. For now however, it will need to support of its coalition partner, which could prove problematic as it looks to make crucial decisions, particularly those which could dramatically change the landscape of Greece and its place within the EU. The coalition leaves lingering question marks on decisions made and this, for now, provides some degree of warmth for the EU and IMF.
Politics, economics and reality don’t mix in an election drive
Make no mistake, Alexis Tsipras has united a huge proportion of Greeks to elevate his Syriza party as the new major party. But this growth of support comes against a backdrop of economic depression characterised by five-years of austerity, a cost of living crisis and huge unemployment (26% of the labour force have no job). The Syriza party has shone a beacon of light to those voters who have had enough and showed a way out of their current turmoil, namely debt repudiation, stop public spending cuts and raise average wages from €580 per month to €751.
It’s easy to see why the party garnered so much support in the recent election and but a key point is this; the first aim of any political party is to govern and this election allowed a window of opportunity for Syriza to do just that. Pledges to end ‘fiscal water-boarding’, which has left Greece trapped in a sort of debt laden prison i.e. its creditors, was Syriza preaching to the tone of the electorate. And it worked. But we need to take some of the claims made in an election drive with a pinch of salt. The reality of a Syriza led Greece begins right now and it could be somewhat different to that of which the party has pledged in recent months.
The main goal is to renegotiate debt, not leave the euro
We should not escape the fact that Syriza’s aim is not to leave the euro, but to renegotiate its debt package with the EU and IMF. The idea of leaving the euro is a potential consequence of how those debt negotiations will progress and with both sides posturing strongly in recent days, this potential is making more and more headlines, something Tsipras will want of course (more on this below).
The Syriza party is at its most powerful and influential, right now. But time is against it and the first real test of its ability to renegotiate its bailout agreement is looming – Greece is due to receive €4.3bn in March, followed by €6.5bn in July and August, funds that are unlikely to be dispersed until any debt renegotiation attempt is finalised.
So time is on the EU/IMF’s hand to delay proceedings. In this sense, we should expect stricter rhetoric from Alexis Tsipras in the coming weeks. He faces quite a battle to renegotiate, especially given the fact Angela Merkel may now have extra vigour to defend her principals following the ECB’s QE announcement, something she opposed. This leads me to my next point…
Compromise is the name of the game
The most likely result will be a compromise between the two sides that will see Greece continue to receive its bailout funds, satisfy creditors and begin to reign in – to a degree – austerity cuts, enabling its living crisis to begin to improve over time. The real question that most investors need to be concerned about is what will that compromise look like? The most likely losers will be bank lenders who will probably face some form of write-down. This is why one of the biggest impacts in terms of financial markets from this election has been a run on bank shares.
Both sides know they have to compromise. Its now a case of who blinks first.
The consequences for Greece could be much worse than in austerity
One would hope that Alexis Tsipras has a cooler head than some of his election pledges may have otherwise suggested. The consequence of a Greek exit from the Euro would have long lasting implications for both sides. The Institute of International Finance estimated that the cost to the Eurozone of a Grexit could be as much as €1 trillion. On the other side of this, a Greek exit would financially annex the country from world creditors and business. These consequences will want to be avoided by both sides. The key will be in understanding ‘what looks like a win’ for Syriza. Can the EU/IMF give them enough to sell to their electorate?
Time will tell how the scenario plays out but the chances of a Grexit remain extremely unlikely. Not only for the reasons I have stated above, the sheer amount of hurdles to overcome before Greece can leave the euro is problematic, and that’s before I contemplate the steps needed to change currency back to the Greek drachma. For now, traders need to keep their wits about them and expect continued tough rhetoric from all sides as part of political game play.
What are better odds than 50/1 today?
Just to help visualise the likelihood of a Grexit, here are a selection of events that are more likely to happen right now.
- SkyBet, 40/1 – UKIP to win the most seats in the General Election (yeh right!)
- PaddyPower, 40/1 – Blackburn Rovers to win the FA Cup (to be fair, after the 4th round, anything is possible)
- Bet 365, 40/1 – Man Utd to win the Premier League (not until they learn to defend)
- SkyBet 40/1 – Alistair Darling to be the next leader of the Labour party (I doubt the labour members would make another leadership mistake)
- PaddyPower 33/1 – Scotland to win the Rugby Six Nations (more chance of me eating a deep fried Mars bar)
How to take advantage of Grexit style volatility?
The Greek election and potential for a Grexit has added even more short term volatility into the financial markets, with the euro, Greek stocks and German banking shares all reacting to the news out of Athens. You can take advantage of these moves by spread betting over 12,000 different financial markets including shares, indices, forex, commodities, bonds and more. To learn about spread betting, simply visit our What is Spread Betting page.
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