31/12/2014
Greece: contagion limited to euro zone
Political changes in Greece are likely to be negative for the Greek economy in the short term and neutral in the longer term, according to Axa IM. On Monday, the coalition government, led by Antonis Samaras, failed to get its candidate elected by the Parliament. As a consequence, early general elections will take place on January 25 and they are likely to give a majority to the leftist party Syriza or a coalition led by this party, although polls suggest the situation remains fluid.Contagion to other euro area markets is likely to be too limited to be material but the uncertainty caused by negotiations between Greece and international lenders is likely to take its toll on risk assets, in the euro area at least. “We believe that this uncertainty should not last very long and that the broad lines of an agreement should emerge before June”, wrote the asset manager.Axa IM made three scenarios. According to its baseline scenario, the new cabinet and international lenders agree on alleviating the weight of Greece’s national debt, on completing and ending the bailout program and help Greece to regain access to the markets thanks to an emergency credit line.A non-cooperative scenario would unfold if negotiations prove lengthier than expected and postpone an eventual agreement beyond mid-2015. Bad for Greece, this scenario implies some spillover effect on other euro area financial markets, not on real economies.A very remote worst case scenario, consequence of unforeseen dramatic political events could led to Greece defaulting on bonds due to the ECB and eventually leaving the euro. Preventing contagion and self-fulfilling consequences would then be in the hands of euro area governments and the ECB.
