Greek Tragedy

The financial crisis in Greece is a long-standing issue that sees little improvement with its unstable political situation. Placing their ideology aside, contesting parties are either for austerity measures or against it. Most recently, Socialist leader Evangelos Venizelos gave up the mandate to form a coalition government after negotiations proved fruitless. Although a coalition may be formed amongst pro-bailout parties, it is not sustainable with strong anti-austerity sentiments, resulting in the need for a new election. Apart from prolonging all the uncertainty in Greece, what does this point to the future of the country?

Currently, 70% of the Greeks support an end to austerity measures, evident from the increasing support SYRIAZ is enjoying. Ironically, a survey reveals a similar percentage of Greeks wanting to stay in the Eurozone. Although there is a commitment by European leaders to keep Greece in it, they face accusations of forcing Greece to leave the EU by dismissing any renegotiations of the bailout terms.

It seemed like an exit is imminent when rising political star, Alexis Tsipras, denounced the bailout terms. Uncompromising, authorities have made it clear that Greece will not receive the next tranche of aid and this is something that cannot be afforded. Furthermore, as much as newly elected leaders would want to satisfy their people in moving away from austerity, they are constrained by the fact that debt payments must still be made and therefore, tightening their belts will be inevitable.

On the other hand, an exit presents the option for Greece to reinstate the Drachma and undergo massive devaluation of the currency. Proponents argue that this may help to improve the economy’s competitiveness by making its exports look more attractive. What Greece needs is to reposition its economy to support growth in the long run and not merely be sustained by aid at the expense of other countries. However, others contend that this radical solution will leave Greece with a crippled economy with higher levels of debt and hyperinflation.

Other negative short-term effects can also be seen in the collapse of the banking sector, severely affecting liquidity locally and economies that have exposure to Greek Banks, mostly Eastern Europe countries like Romania and Bulgaria. In view of a certain degree of contagion effect, we expect more volatility in global markets due to natural risk aversion and negative market sentiment. Previously we have seen stock indexes in London, Paris and Frankfurt all dropping by more than two percent and we are likely to see dips exceeding or at least on par with these percentages following a sell out. Portfolios are likely to see similar trends, the extent of which is limited to how resilient stock picks are.

Looking long-term, market expectations should start to adjust and the EU will be in a better position to ride out any remaining traces of the crisis. Portugal, Ireland or Spain might be next to default but talks to build up a “Financial Firewall” can circumvent a Greek domino effect with the issuance of Eurobonds and greater political will to effect a proper recovery of the Eurozone. Hence, a fall in stock markets presents investment opportunities, especially with a rebound well on its way.

 

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