It will be politics rather than economics (or Q€) that drives the shorter-term outlook in Greece. Goldman Sachs warns that the new Greek government’s position is turning more Eurosceptic and confrontational than most (and the market) had anticipated ahead of last weekend’s election. This increases the risk of a political miscalculation leading to an economic and financial accident and, possibly, Greek exit from the Euro area (“Grexit”) and while many assume European authorities have the ‘tools’ to address market dislocations arising from this event risk, Goldman expects significant market volatility. Rather stunningly, against this background, and in spite of Q€, recommends closing tactical pro-cyclical exposures in peripheral EMU spreads (Italy, Spain and Portugal) and equities (overweight Italy and Spain).
Via Goldman Sachs,
- It will be politics rather than economics that drives the shorter-term outlook in Greece. Our base case remains that, eventually, some accommodation will be found between the new Greek government and Greece’s official creditors. This view has led us, so far, to expect modest spillovers from financial tensions in Greece to other Euro area markets. Thus far, this has proven correct.
- But the new Greek government’s position is turning more Eurosceptic and confrontational than we anticipated ahead of last weekend’s election. This increases the risk of a political miscalculation leading to an economic and financial accident and, possibly, Greek exit from the Euro area (“Grexit”). While the European authorities now have better tools to address market dislocations in general (and the re-emergence of convertibility risk in particular), these are unlikely to be activated in a manner that entirely pre-empts market tension should Grexit risks intensify or materialise. We would expect significant market volatility surrounding an event of such systemic nature as Grexit. The intensity and persistence of such volatility would depend on the process by which Grexit occurred, and on the nature of the policy and political response to it in other Euro area countries.
- Against this background, we recommend closing tactical pro-cyclical exposures in peripheral EMU spreads (Italy, Spain and Portugal) and equities (overweight MIB and IBEX vs. SXXP) until more clarity emerges about the direction ongoing negotiations between the new Greek government and the European authorities are taking. However, we continue to see the medium-term prospects for the European equity market as attractive given the high equity risk premium, the impact of QE in moderating deflationary fears, and improving cyclical prospects driven by the impact of lower oil prices and a weakening Euro exchange rate. We continue to see tighter intra-EMU spreads, steeper EURIBOR and ‘core’ yield curves over the balance of this year, and forecast 390 on the SXXP and 3800 on the SX5E over 12 months.
Greece: Taking stock post-election
Background – Pre-election expectations
1. Ahead of the Greek elections, it was widely anticipated that a new Greek government led by the radical-left Syriza party would embark on its promised renegotiation of the terms at which Greece receives financial support from the European and international authorities. Key elements of such a renegotiation would be: (a) demands for debt relief; (b) less strenuous (or even a reversal of) fiscal adjustment; and (c) relaxation of the conditionality and control over Greek policies imposed by the ‘troika’ (the European Commission, ECB and IMF overseers of Greece’s adjustment programme). These demands run counter to the terms offered by the European authorities in their proposed extension to the existing Greek adjustment programme.
2. The threat of renegotiation promised a period of heightened political tension between the new Greek government and the European authorities, as each staked out its bargaining position. In turn, these political tensions were likely to create strains in the Greek financial sector, reflecting market participants’ concerns that external financial support could be disrupted by the political stand-off.
3. In these circumstances, the risk of a Greek exit from the Euro (“Grexit”) would rise. Whatever the economic incentives to seek a compromise, in a fraught political situation the danger of a miscalculation leading to disorderly exit always exists. Yet nevertheless, ahead of the elections our base case was that ultimately a new accommodation would be found (see: “Greece: Uncertainty to persist and peak well after the election”, Global Markets Daily, January 23, 2015).
On the Greek side, the stated ambition of Syriza (and its leader, the new Prime Minister Alexis Tsipras) – in line with the overwhelming view of Greek public opinion (as reflected in polls) – was to retain the Euro and Greek membership of the Euro area. The realities of financial and economic dependence on external support, as well as the moderating effect of the anticipated more pro-European coalition partners in the new government, would eventually lead Syriza to seek some compromise.
By Thomás Aengus O Cléirigh
No matter what happens to Greece, the rest of Europe, Spain, Italy, Portugal, Ireland, Belgium France, peoples are now awakening only to see that the whole austerity “Thing” was nothing short of an engineered smash and grab of the savings ( National pension fund) and cash cow potential ( Tax collections) of the working class! A financial /economic system that rewards private gamblers who infest the national banks and are able to do as they please and if the reckless and downright criminal and treasonable actions result in massive debts the citizens of said countries are forced to pick up the tab! NO MORE! Greece is just the beginning and we the peoples of the various enslaved countries will not stop until we have rid ourselves of this toxic financial system: We want a better future for our children we have shafted all our lives and we are slowly waking up to the lies of this insane financial and political system where we always lose! We must always put of having a decent liven now for some unspecified future, but our political parasites and the bankers can have lottery lifestyles now! NO More! We will ensure our children will not have to pay these odious debts period!
We must end this monopoly money financial system where the ordinary people are always the losers!