“As largely expected, Syriza has emerged as the largest party in last night's Greek Elections. Its mandate from the electorate is, in essence, to renegotiate the terms of membership with the Eurozone and free the economy from a seemingly endless period of contraction through restructuring its debt obligations. Whilst I would imagine that much will be made of a renewed threat to the euro project as a result of this election outcome, I would argue that there are reasons to believe that the impact for European investors and even for economic growth across the region may be more modest than feared.
Potential for reform
With the serious prospect of victory looming, Syriza has repeatedly stated a desire to remain within the single currency. Whilst this is far from guaranteed, what will be potentially attractive to other member states will be the party's determination to address vested interests and clamp down on corruption and the grey economy. In order to establish a stronger foundation, the Greek economy must move toward a broader base of tax revenue. This will only happen if a deep-seated culture of avoidance is addressed. The emphasis of key creditors within the Eurozone has already shifted from austerity to reform and Syriza may find greater support from the mainstream European parties than its 'radical' tag would suggest.
Contagion risk
The election victory may be read as an indication that populist parties across the region will have the same success, compounding the threat to a 'fragile' currency union. I would challenge this observation. It is clear that Syriza’s core political agenda will fall way short of the 'hopes' of the more radical factions within the party. Also, the challenges facing the Greek economy remain uniquely acute within the region. Whilst Greek borrowing costs rose substantially from the second half of last year, we have continued to see spreads tighten across most of the economies that were deemed to be vulnerable during the sovereign crisis.
Europe in a stronger position
Arguably at the forefront of most investors' minds is the risk of contagion. The outcome of the Greek election is the latest but will certainly not be the last negative focal point for European commentators. It is, however, worth taking a step back and reflecting that the financial sector across Europe is in a significantly more robust position today than it was at the last 'peak' of the sovereign crisis in 2011. Over the last few years we have seen the major financial institutions across the region rebuild capital, reduce cross-holdings and undergo a rigorous stress test which implies that the ability for the sector to absorb shock is now substantially greater. That is not to say that tail risks within the Eurozone have evaporated entirely, it is just to emphasise that the degree to which localised issues have the capacity to materially and immediately alter the risk premium throughout the region has clearly reduced. To that end, it suggests that returns are more likely to be driven by fundamentals going forward to a greater extent than has been the case at various (sometimes extended) points over the last few years.
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