In­vestors play down the po­lit­i­cal risk

If wrong, mar­ket play­ers will rush to cor­rect their mis­take and Greek as­sets and econ­omy will feel the pinch

Kathimerini English - - Front Page - BY DIM­ITRIS KONTOGIANNIS

ANAL­Y­SIS Many an­a­lysts and oth­ers have ex­pressed cau­tion about the height­ened po­lit­i­cal risk ahead of this year’s twin elec­tions for lo­cal au­thor­i­ties and the Euro­pean Par­lia­ment. How­ever, mar­ket par­tic­i­pants seem to dis­agree, with Greek eq­ui­ties mak­ing their strong­est start in many years and bonds ral­ly­ing aided by up­beat sen­ti­ment on the euro pe­riph­ery af­ter Ire­land’s suc­cess­ful sale of gov­ern­ment debt. It is clear for­eign in­vestors are will­ing to down­play Greek po­lit­i­cal risk in their cal­cu­la­tions, at least for now. Al­though fi­nan­cial mar­kets some­times make mis­takes, we should not rule out the pos­si­bil­ity they are right about Greece this time around.

The gen­eral stock in­dex of the Athens bourse added gains of 7.5 per­cent last week, bring­ing the to­tal for the year to about 11 per­cent. The gains have been un­der­pinned by the strong per­for­mance of bank stocks, de­spite talk of ad­di­tional cap­i­tal needs, fol­low­ing the Black­Rock stress tests which could have led to share cap­i­tal in­creases. Banks are typ­i­cally cycli­cal plays in the stock mar­ket jar­gon since their earn­ings have a high cor­re­la­tion with the coun­try’s busi­ness cy­cle. So, their dou­ble-digit gains since the be­gin­ning of 2014 point to mar­ket ex­pec­ta­tions for an eco­nomic turn­around.

Greek gov­ern­ment bonds have also ad­vanced strongly as the yield of the bench­mark 10-year bond fell be­low 8 per­cent af­ter end­ing the pre­vi­ous year at 8.57 per­cent. It stood at 11 per­cent at the end of June 2013 and was close to 11.90 per­cent at the end of 2012. More im­por­tantly, in­vestors de­manded a smaller risk pre­mium to buy

of Greece’s main left­ist op­po­si­tion SYRIZA party, has called for gen­eral elec­tions if his party fin­ishes first in the bal­lot for the Euro­pean Par­lia­ment in May. Greek bonds over Ger­man debt in the rel­a­tively thin sec­ondary mar­ket. The risk pre­mium sep­a­rat­ing the Greek bond from its Ger­man coun­ter­part broke be­low 600 ba­sis points ear­lier this year. The last time the 10-year yield spread fell to th­ese lev­els was in June 2010, a month af­ter Greece re­quested a bailout.

Of course the pos­i­tive de­vel­op­ments in the bond mar­ket largely re­flect mar­ket eu­pho­ria about the prospects of the eu­ro­zone pe­riph­ery af­ter Ire­land man­aged to sell 10-year bonds at low in­ter­est rates, and oth­ers, like Por­tu­gal, fol­lowed suit. In­vestors are grow­ing more con­fi­dent Por­tu­gal will be able to exit its bailout pro­gram next sum­mer and Greece will make more progress on the fis­cal front and struc­tural re­forms.

How­ever, the ex­cel­lent per­form- ance of Greek eq­ui­ties and bonds since the start of the year is at odds with the widely held view about a pickup in po­lit­i­cal risk as opin­ion polls show greater sup­port for anti-bailout par­ties. More­over, Alexis Tsipras, leader of the main left­ist op­po­si­tion SYRIZA party, has called for gen­eral elec­tions if his party comes first in the bal­lot for the Euro­pean Par­lia­ment in May. Given the two-party coali­tion gov­ern­ment’s slim ma­jor­ity in Par­lia­ment – 153 out of 300 seats – a clear de­feat of the two rul­ing par­ties at the bal­lot boxes next May could un­der­mine the ad­min­is­tra­tion and lead to a pro­tracted pe­riod of po­lit­i­cal un­cer­tainty, many an­a­lysts and oth­ers reckon.

How­ever, a good deal of for­eign in­vestors seem to hold a dif­fer­ent view on the sub­ject. Ac­cord­ing to them, the po­lit­i­cal risk is not as high as many an­a­lysts and oth­ers think, for two rea­sons. First, no main­stream Greek po­lit­i­cal party is in fa­vor of the coun­try ex­it­ing from the eu­ro­zone or has a plan for it. In their opin­ion, the main op­po­si­tion party may be against aus­ter­ity and other re­forms, but it has no means of fi­nanc­ing an ex­pan­sion­ary fis­cal pro­gram if it comes to power. There­fore, it will have to bow to the de­mands of the cred­i­tors sooner or later since they will be the only source of bor­row­ing when it re­al­izes the pri­mary sur­plus is dwin­dling as spend­ing rises and rev­enues fall on un­cer­tainty. Past threats by SYRIZA of­fi­cials about a mora­to­rium on debt pay­ments to pro­vide the nec­es­sary funds are not thought to be cred­i­ble since the ad­verse side ef­fects on the Greek econ­omy could be enor­mous.

A sec­ond rea­son for­eign in­vestors have taken such a san­guine view on Greek po­lit­i­cal risks re­lates to the po­si­tion of the eu­ro­zone. In their view, the Greek pub­lic debt is pass­ing more and more into the hands of of­fi­cial cred­i­tors, mainly the eu­ro­zone coun­tries, which have nat­u­rally no in­ter­est in suf­fer­ing the kind of di­rect and in­di­rect losses a Greek exit from the euro would en­tail. In ad­di­tion, a Greek exit could un­der­mine the po­lit­i­cal project of the euro and do away with its ir­re­vo­ca­bil­ity clause. There­fore, it is not in of­fi­cial cred­i­tors’ in­ter­est ei­ther to rock the boat, throw­ing more oil into the fire of po­lit­i­cal risk.

Of course, mar­ket par­tic­i­pants some­times make mis­takes and they could be wrong about po­lit­i­cal risk this time around. If that’s the case, they will rush to cor­rect their mis­take and Greek as­sets, along with the econ­omy, will feel the pinch. How­ever, they have no rea­son to do so as long as sen­ti­ment about the eu­ro­zone pe­riph­ery re­mains up­beat and Greece con­tin­ues to make progress, pri­mar­ily on the fis­cal front.

Struc­tural re­forms may be im­por­tant but yield fruit in the medium to long term and mar­kets tend to over­look them, un­like pol­i­cy­mak­ers out­side the coun­try. Un­der th­ese cir­cum­stances, in­vestors’ pos­i­tive at­ti­tude to­ward Greek po­lit­i­cal risk should be taken se­ri­ously into ac­count. Af­ter all, they put their money where their mouth is.

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