Not only last year was a bad year for Greek market, Greece Athex is one of the worst 2014 performers (total return) with a 29% drawdown, but the country has suffered from political instability since the beginning of June. Since Syriza’s triumph in European elections on May 25th, the 10-year bond yield has soared from a low of 5.5% on June 10 to over 10% on ‘Grexit’ fears (the 3-year bond yields trading at 13.6%, up 10% over the past four months). The – Hellenic Republic – 5-year CDS, a good measure of the country’s default risk, is up more than 1000 bps, now trading around 1500bps. There has been some speculation of a possible ‘Grexit’ scenario; and as Der Spiegel news reported lately, German Chancellor Merkel is ‘prepared to let Greece leave the euro zone’ if the country abandons fiscal discipline and does not repay debts to its creditors.
2015: another difficult year for Greece
This year, according to Nomura’s analysts, Greece will face total payments (Principal + Interests) of 22.3bn Euros; €8bn scheduled to be paid to the ECB (mainly in July and August). As you can see it on the chart below published by Eurostat, which shows EuroZone debt and deficit by country, with a debt-to-GDP ratio standing at an all-time-high of 175% (despite the debt ‘haircut’ back in March 2012) and a deficit of 12.7% in 2013, there is no doubt that the country’s debt is unsustainable.
There is nothing to stop it growing except haircuts, i.e. ‘partial’ default. Even though Greece’s recession has ended last year after almost six years of misery (the economy is now 30% less than in 2008), financial conditions (unemployment rate at 26% in total and 50% for youth, deflation for the past two years) will weigh on the economy longer than many analysts expect, especially now with the global macro conditions.
How strong is the anti-austerity party in Greece?
To sum up briefly the events of the past few weeks, Greece failed to approve a president (Stavros Dimas) nominated by PM Antonis Samaras as the number of votes didn’t reach 180 after three consecutive rounds (in the last round, 168 Greek lawmakers voted in favor of Dimas, 132 against). Therefore, as the Parliament failed to elect the President, Greek Constitution provides that the Parliament is being dissolved and snap earlier elections.
Greek elections will take place in a couple of weeks (on January 25) and the question is What could it look like?
In the last days of 2014, I remember that a first poll done by Alco for Proto Thema suggested that no party will have a clear majority in the new parliament (as one party will need roughly 35% of the Greek votes in order to gain an absolute majority). At that time, Syriza, a leftist anti-austerity party led by Alexis Tsipras, was ‘leading’ the league with 28% of the votes, followed by liberal-conservative New Democracy (ND) with 23%.
The market’s reaction was quite brutal as I said earlier as many investors fear that Greece may be forced to leave the Euro. The Syriza party wants to abandon the austerity measures imposed by the Troika as part of the €240bn bailout and wants a writedown on the nominal value of Greek Debt. I like the chart below (Source: Bloomberg) that gives you an idea of the government exposures to Greek’s public debt. The main bloc is held by official creditors (Euro-area governments: 62%; followed by the IMF, 10% and the ECB 8%). As you can see it in the chart, Germany is the major government-creditor of Athens and has more than €60bn in total exposure.
Greece bank shares (Alpha bank, Piraeus) all collapse over the past few weeks as fear of bank solvency and bank runs surged (Cyprus ‘bail-in’ regime continental template?). As a matter of fact, interruption of liquidity by the ECB to Greek banks will potentially lead to a ‘Cyprus type’ bank holiday.
Latest update: An article from the WSJ came up earlier this morning, and says that in nine separate opinion tools that were published in the Greek media in the last couple of days, Syriza is still on top and would garner ‘between 27.1% and 31.2%’ of the votes.
ECB meeting and consequences on the Euro.
As we know, any spike in Euro peripheral (or core) bond yields has usually bad consequences on the single currency. Even though Greece doesn’t represent a major risk for the 19-nation economy, I strongly believe Greece is and will be the ‘hot’ topic of the next couple of weeks (with the Yen as usual). And at the moment, Greece makes ECB policymakers’ life complicated, concerning the central bank’s introduction of its public QE in order to counter deflation now (yes, you read it, deflation of -0.2% in December).
EUR/USD broke its 1.20 psychological support earlier this year and is now trading slightly above 1.1800 (a 9-year low). The next support that traders will target now stands at 1.1640, which corresponds to 2005 low.
I don’t think the market will react aggressively at the next ECB meeting on January 22nd, and even though we don’t hear any update concerning its QE, the Euro is still capped on the topside. I added below a timeline from Morgan Stanley that sums up the Key risk events for the EZ this quarter.
Below is another chart posted by SG Research that shows the ‘global macro’ euro are agenda for January and the downside/upside risk scenarios. As you can see, it includes the (forgotten) OMT case with the European Court of Justice’s decision on the legality of the ECB program for sovereign bonds.
(Source: SG Research)