CIO Flash
Greek election implications – Odysseus or Icarus?
January 26, 2015
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Election aftermath
— Syriza, a left-wing political party in greece, came very close to gaining an absolute majority in the January 25 elections and will now form
a government in coalition with the small Independent Greeks, a greek right-wing political party.
— The new coalition is expected to start talks quickly with the “Troika” (see glossary). Greece will be a big topic at today’s Eurogroup
meeting and Greece's bailout program will remain in place at least until the end of February, providing a basis for negotiations. In reality,
th implicit
the
i li it deadline
d dli for
f a conclusion
l i to
t talks
t lk is
i when
h the
th Greek
G k governmentt runs outt off funds
f d – expected
t d to
t be
b in
i mid-March
id M h or perhaps
h
earlier.
— A Greek exit from the Eurozone is not the immediate issue. Instead, the immediate focus will be on Greek debt which is equivalent to
174% of gross domestic product (GDP) and unsustainable. Longer-term, attention will be focused on the likely impact of Syriza’s
intended policy changes on Greece’s current account and whether a renewed deficit here can be funded.
— A continuing major risk is a run on Greek banks, which would be quick and brutal. Greek banks’ reliance on the European Central
Banks’s (ECB) Emergency Liquidity Assistance (ELA), put in place last week, may provide an early indication if this is happening.
What happens now
— We are now faced by a situation where Syriza
Syriza’s
s plans could result in a quick fall from the sky (Icarus) or a long and complicated voyage
with an unknown outcome (Odysseus).
— Syriza has committed itself to re-negotiating Greece’s debts (80% of which are now held by public-sector institutions). While Syriza
might like some of this debt to be written off – for domestic, political reasons – we do not think this is likely to happen, due to both
broader Eurozone political concerns (e.g. unacceptability to Germany) and technical reasons (e.g. the ECB’s inability to write off bonds).
— Instead, it seems likely the maturity of Greek debt will be extended and the interest rate paid on it reduced – so we might end up with in
effect a perpetual bond. Fortuitously, the advent of ECB quantitative easing (QE) may make this politically easier within the Eurozone –
if Greece pays only a very low interest rate on its debt, this may appear less iniquitous to other Eurozone-periphery economies if they
can use QE to lower the interest paid on their debt to similarly low levels.
— Assuming
g that Greek debt can be rescheduled in this way,
y, and that the result p
provides sufficient short-term relief,, attention will then turn
to Syriza’s other policy intentions. The issue here is that while Greece still needs to implement supply-side reforms to make it more
competitive, Syriza’s policies are focused entirely on the demand side (boosting pensions, creating jobs in the public sector, etc.) The
risk is that these reforms pull Greece’s current account back into deficit, and that funding this will be very difficult. Recent Eurozone
history suggests that economies in crisis running current-account deficits are vulnerable.
— Our base scenario is therefore that the immediate problem posed by Greece’s debt can probably be overcome but that problems
surrounding Greek finance are likely to come to the surface again later in 2015. This is going to be a long and complicated voyage.
Investment implications
— The financial markets’ immediate reaction to the Greek election result was muted, with the result apparently largely priced in. We think
th t for
that,
f the
th Eurozone
E
as a whole,
h l QE remains
i off much
h greater
t importance
i
t
th the
than
th result
lt and
d therefore
th f
stay
t broadly
b dl positive
iti for
f now.
— Equities: We remain overweight German and Eurozone equities in our tactical CIO view. Of course, if the progress of Syriza’s
negotiations with the Troika raises fears of Greece exiting the Eurozone, then equity-market volatility will increase, but we believe that
this can ultimately be avoided. The election result could however have a (positive) effect on Eurozone equities through further euro
weakness. Note that while European equity markets have been strong in recent days in euro terms, with severe euro weakness
boosting earnings expectations, they are almost unchanged year-to-date (YTD) in U.S.-dollar terms. Looking forward, the focus of
European equity investors should turn back to the real economy, the attractiveness of dividend yields in a low-interest-rate economy and
the fourth-quarter reporting season which is already at full speed in the U.S. and should get under way in Europe in the next two weeks.
— Fixed Income: We do not foresee substantial contagion from the Greek election result and are likely to remain tactically overweight in
Bunds and the periphery.
periphery If Greece gets some debt relief,
relief the temptation for other countries to try and follow suit should be limited,
limited for
the reasons given above. Even if Greece was to leave the Eurozone (which is not our base scenario), we would expect massive
accompanying measures to keep the fallout for other Eurozone economies under control.
— FX: Soon after the election, some profit-taking lifted euro/US-dollar from levels slightly below 1.11 back towards 1.1250. Over the
coming weeks, euro vs. US dollar, Japanese yen and British pound will react to progress in the Troika/Greek government-debt
negotiations. The biggest short-term risk for a Greek-led euro sell-off would be a bank run by Greek savers, but otherwise euro
weakness will stem from QE and negative-yielding sovereign-debt implications. Contagion risk from Greece exiting the Eurozone is
hardly priced into the market, while markets believe that QE could contain a periphery-bond sell-off. Meaningful euro
appreciation/correction is unlikely in the context of ongoing debt negotiations.
Investments are subject to various risks, including market fluctuations, regulatory change, counterparty risk, possible
delays in repayment and loss of income and principal invested. The value of investments can fall as well as rise and
you may not recover the amount originally invested at any point in time.
Deutsche AWM expectations 2015. Forecasts are based on assumptions, estimates, opinions and hypothetical models or
analysis which may prove to be incorrect. No assurance can be given that any forecast or target will be achieved;
Deutsche AWM Investment GmbH, CIO Office; Deutsche Bank AG
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CIO Flash – Greek election implications – Oddyseus or Icarus – January 26, 2015.
Glossary
Explanation of terms
Bunds – Commonly used term for bonds issued by the German federal government with a maturity of 10 years
ECB’s Emergency Liquidity Assistance (ELA) – is a measure whereby a national central bank of the
Eurosystem grants central
central-bank
bank money to a solvent financial institution that is experiencing temporary liquidity
problems
Eurogroup meeting – is a meeting of the finance ministers of the Eurozone, i.e. those member states of the
European Union which have adopted the euro
European Central Bank (ECB) – is the central bank for the euro. It administers the monetary policy of the
Eurozone, which consists of 19 European Union member states
European Commission (EU Commission) – is the executive body of the European Union (EU) which
represents the interests of the EU
Eurozone – Comprised of the 19 member states of the EU, which have accepted the euro as their common
currency and their sole legal tender. The states are: Austria, Belgium, Cyprus, Estonia, Finland, France,
Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia
and Spain
EUR/USD – an abbreviation for the exchange rate of the U.S. Dollar against the Euro
Gross domestic product (GDP) – is the value of all goods and services produced by a country’s economy
Independent Greeks party – is a national-conservative political party in Greece which wants an end to the
austerity
y reforms
International Monetary Fund (IMF) – is an international organization which fosters global monetary cooperation
and monitors economic and financial developments
Overweight – the investment holds a higher weighting in a given sector or security than the benchmark.
Underweight means the investment holds a lower weighting.
Periphery
P
i h
– commonly
l used
d term ffor the
h outlying
l i states off the
h eurozone e.g. IIreland,
l d P
Portugal,
l G
Greece, S
Spain
i
and Italy
Quantitative easing (QE) – is the broad-based asset-purchase program conducted by central banks; these
assets can be government bonds, but also other assets like asset-backed securities
Syriza – is a left-wing political party in Greece, and is considered skeptical of the European Union. The party
rejects
j
foreign
g demands for structural reforms
Troika – consists of the International Monetary Fund (IMF), the European Central Bank (ECB) and the EU
Commission
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CIO Flash – Greek election implications – Oddyseus or Icarus – January 26, 2015.
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