Greece and the ECB - is the Eurozone crisis about to make a comeback?

While Syriza has won the Greek election, a Grexit is not the most likely outcome. Even if Greece were to exit the Euro, peripheral Europe is now in far better shape than in 2010-12 and Eurozone defence mechanisms are stronger. While the Euro likely has more downside, Eurozone shares are attractive reflecting relatively cheap valuations, the likelihood of stronger growth ahead and very easy ECB monetary conditions.

By Shane Oliver · 27 Jan 2015

By Shane Oliver ·
27 Jan 2015

Comments

With Greece back in the headlines after Syriza’s election win, it’s natural to wonder whether we are going to see a rerun of the Eurozone crisis that roiled global financial markets in 2010- 2012. However, much has changed since 2012. This note looks at the main issues.

Grexit not the base case

While left-wing Syriza won the election with 36.3% of the vote and has formed a coalition Government with the conservative Independent Greece party there is a long way to go yet before a Greek exit (Grexit) from the Euro will occur, if at all. First, it’s not clear how stable the new coalition will be, so another election cannot be ruled out. But assuming it holds, the next step is negotiations with the Troika of the IMF, EU and ECB that holds 80% of Greek debt regarding the ongoing debt support and reform program for Greece. Reaching an agreement could take months and will likely be the source of financial market volatility.

However, the likelihood is that an agreement will ultimately be reached. The Troika may be prepared to tolerate a slight softening in the Greek program, but not too much for fear of being seen to reward Greek voters and with the ECB embarking on QE the threat of a Grexit to the rest of Europe isn’t what it used to be. Rather the pressure will mainly be on Syriza to compromise. Failure to reach an agreement will mean the end of Troika funding for Greece resulting in even worse austerity and the withdrawal of ECB support for Greek banks. The latter would result in an instant banking crisis, causing a renewed lapse into recession. In order to get elected, Syriza is no longer seeking to leave the Euro as it recognised that 70% of Greeks want to stay in. As the realities of Government dawn on Syriza leader Tsipras, a further softening in its stance is likely to clear the way for an agreement. But this could take months and entail some difficult moments. However, markets will just have to get used to this, as they have with the Ukrainian conflict.

But even if there ultimately is no agreement thereby putting Greece on a path to exit the Euro, the threat of contagion to the rest of the Eurozone is far less than it was in 2010-12 as peripheral countries and defence mechanisms are stronger.

To read the full article, please click here

Go to Google News, then click "Follow" button to add us.

Share this article and show your support

Frequently Asked Questions about this Article…

Is the Eurozone crisis likely to make a comeback due to Greece's current situation?

While Greece's political changes have raised concerns, the Eurozone crisis is less likely to make a comeback. The situation has evolved since 2010-2012, with stronger defense mechanisms in place and less threat of contagion to the rest of the Eurozone.

What is the likelihood of Greece exiting the Eurozone, also known as 'Grexit'?

A 'Grexit' is not the base case scenario. Although political changes in Greece have created uncertainty, the new government is not seeking to leave the Euro, as a majority of Greeks prefer to stay. Negotiations with the Troika are expected to continue, aiming for an agreement.

How stable is the new Greek coalition government?

The stability of Greece's new coalition government, formed by Syriza and the Independent Greece party, is uncertain. Another election cannot be ruled out, but the focus remains on negotiating with the Troika to secure ongoing debt support.

What role does the Troika play in Greece's financial situation?

The Troika, consisting of the IMF, EU, and ECB, holds 80% of Greek debt and is crucial in negotiations for Greece's debt support and reform program. An agreement with the Troika is essential to avoid severe austerity and a potential banking crisis.

How might financial markets react to the ongoing situation in Greece?

Financial markets may experience volatility as Greece negotiates with the Troika. However, markets have adapted to similar situations, such as the Ukrainian conflict, and are likely to adjust to developments in Greece over time.

What could happen if Greece fails to reach an agreement with the Troika?

Failure to reach an agreement with the Troika could end funding for Greece, leading to severe austerity and the withdrawal of ECB support for Greek banks. This would likely trigger a banking crisis and a renewed recession in Greece.

Why is the threat of contagion from Greece to the rest of the Eurozone less severe now?

The threat of contagion is less severe because peripheral countries and defense mechanisms within the Eurozone have strengthened since the 2010-2012 crisis. This reduces the risk of a widespread financial impact from Greece's situation.

What changes have occurred in Greece's political stance since Syriza's election win?

Since Syriza's election win, the party has softened its stance on leaving the Euro, recognizing that 70% of Greeks wish to remain. This shift is expected to facilitate negotiations with the Troika, although it may take time and involve challenging moments.