The fact that Greece’s national elections on May 21 are not expected to result in independence means there will be near-term uncertainty as markets wait to see whether a coalition government will emerge or a run-off election battle. will follow, he notes in his analysis by the Reuters agency.
The strong position of current Prime Minister Kyriakos Mitsotakis with the European Union and his commitment to reform should reassure investors if he wins the elections. At the same time, a healthy economy means a victory for SYRIZA may not disrupt markets as it did in its victory in 2015, Reuters notes.
“From the moment Greece almost left the euro zone in 2015, the situation has changed and no one has serious concerns in the short term,” said Capital Economics’ chief economist for Europe, Andrew Kenningham.
Here are 5 questions from Reuters regarding the market:
1. What is the biggest problem for voters?
The cost of living crisis, inflation hitting the purchasing power of consumers.
Inflation hit 12.1% in September and has since slowed to 4.5% year-on-year due to lower energy prices. Average annual wages are still around 25% lower than their peak since 2009, according to OECD data.
“We’ve seen a huge squeeze on wages over the past 10 years and people have really felt that pressure,” said Wolfango Piccoli, co-chairman of financial consultancy Teneo.
2. What do the elections mean for Greece’s return to investment grade?
With three of Greece’s four credit ratings sitting just a notch below investment grade, the election could be the last hurdle for the country to regain the status it lost a decade ago.
S&P Global said it could raise Greece’s BB+ rating over the next year if the new government maintains fiscal discipline and the pace of reforms that will unlock funds from the EU Recovery Fund.
Goldman Sachs, for its part, said executing Kyriakos Mitsotakis’ plan to roughly triple spending of EU funds this year could be the “last step” in an upgrade.
Greece’s long-term borrowing costs, at around 4%, are already lower than Italy’s, and a higher-quality recovery would likely lower them.
But most of the good news about Greece’s rating may already be priced in, said BlueBay Asset Management portfolio manager Kaspar Hense.
3. Will investors abandon Greek assets if Mitsotakis loses?
Such a thing seems unlikely. Investors view Mitsotakis’ leadership as stable due to his close ties to the United States and Brussels, but views on SYRIZA have changed significantly since the financial crisis. After all, Greece has one of the best growth rates in the Eurozone.
“Investors are looking for political stability first and would welcome the retention of Prime Minister Mitsotakis,” Teneo’s Piccoli said, adding that this “clearly favors the market.”
A SYRIZA-led government could hurt sentiment, but a repeat of 2015, when SYRIZA’s victory sent Greek stocks down 24% that year and Greek 10-year yields down 19%, is seen as unlikely. .
“SYRIZA has become much more mainstream since it’s been in government, so there’s little chance we’ll see another repeat of the volatility of 2015,” said Mazars Wealth Management chief economist George Lagarias.
4. What do the elections mean for Greek stocks?
A decisive victory for New Democracy or SYRIZA could bring short-term outperformance.
The Athens Stock Exchange is up about 21% year-to-date, while the European STOXX 600 is up 10%. The shift to banks, fueled by rising interest rates, helps explain the ASE’s outperformance.
Investors will be watching the government’s plans to sell its stakes in Greek banks.
The state-run Financial Stability Fund, set up during the debt crisis, said it would divest its banking holdings by the end of 2025. It owns around 40% of the National Bank of Greece, 27% of Piraeus Bank, 9% of Alpha Bank. and 1.4% in Eurobank.
“The good news is that after the elections and the return to investment grade, there will be a lot more interest and better valuations for banks,” said Al Alevizakos, senior executive at AXIA Ventures Group.
5. What about the euro?
Elections, which have been a trigger for EUR selling in the past, are not important for traders this time around.
The EU Recovery Fund and an ECB emergency bond-buying tool eased fears of a eurozone breakup.
“This whole ‘regional pressures’ thing has really taken a back seat,” said Adam Cole, senior executive at RBC Capital Markets.
The euro is one of the best performing G10 currencies this year, rising more than 1.5% to $1.087.