Greek elections: five questions for the markets

Greece will vote on Sunday in what is likely to be an inconclusive election, which means short-term uncertainty as markets wait to see if there will be a coalition government or a second round.

The strong relationship with the European Union and the push to reform current Prime Minister Kyriakos Mitsotakis should reassure investors if he succeeds. A strong economy means a victory for the left-wing opposition party Syriza may not roil markets as it did when it won in 2015.

“Greece is now poised for expulsion from the eurozone in 2015, but nobody is too concerned about the near term,” said Andrew Kenningham, chief European economist at Capital Economics.

Here are five key questions for the markets.

1/ What is the biggest problem for voters?

A cost-of-living crisis, with inflation eroding consumers’ purchasing power.

Inflation rose to 12.1% in September and has since fallen to 4.5% year-on-year due to falling energy prices. Average annual wages are still about 25% lower than their peak in 2009, according to OECD data.

“In the last 10 years wages have shrunk dramatically and people have really felt the pain,” said Wolfango Piccoli, co-president of financial advisory firm Teneo.

2/ What does the election mean for Greece’s return to investment status?

With three out of four credit ratings only one notch below investment grade, the election could be the last hurdle before Greece regains the status it lost more than a decade ago.

S&P Global said it could raise Greece’s rating to BB+ within a year if the new government maintains fiscal discipline and a pace of reforms that free up recovery funds from the EU.

Goldman Sachs says implementing Mitsotakis’ plan to nearly triple EU money spending this year could be the “final step” toward the upgrade.

Greece’s long-term borrowing costs are lower than its Italian counterpart at about 4%, and an investment grade rating is likely to lower those costs even further.

Much of the good news for Greece’s rating has already been priced in, said Kaspar Hines, portfolio manager at BlueBay Asset Management.

3/ Will investors dump Greek assets if Mitsotakis loses?

unlikely. Investors view Mitsotakis as a steady hand, given his strong ties with the United States and Brussels, but opinions on Syriza have changed a lot since the financial crisis. Greece also has one of the best growth rates in the Eurozone.

“Investors are looking first for political stability and would welcome Mitsotakis back into government,” Picoli said.

A Syriza-led government could hurt sentiment, but a repeat of 2015, when a Syriza win sent Greek shares down 24% that year and Greece’s 10-year yield to 19%, is considered unlikely.

“Syriza has become more widespread now that it’s in government, so there’s little chance of a repeat of the swings of 2015,” said George Lagarias, chief economist at Mazars Wealth Management.

4/ What does the election mean for Greek stocks?

A decisive win for either side could contribute to an outperformance in the short term.

Greece’s ATHEX is up about 21% so far this year, while Europe’s STOXX 600 is up 10%. Bank preference, buoyed by higher interest rates, helps explain Greece’s outperformance.

Investors will pay attention to the government’s plans to liquidate its holdings in Greek banks.

The Greek Financial Stability Fund, set up during the debt crisis, says it will divest its bank interests by the end of 2025. It owns about 40% of the National Bank of Greece, 27% of Piraeus, 9% of Alpha Services and Holdings, and 1.4% of Eurobank.

“The good news is that after the election and a return to investment grade… there will be more interest and better (bank) valuations,” said Alevizakos, managing director of research at AXIA Ventures Group.

5/ What about the Euro?

The elections, which in the past were a reason to sell the Euro, are not a major issue for currency traders this time around.

Stronger cohesion, the European Recovery Fund and the European Central Bank’s emergency bond-buying vehicle allayed fears about a breakup of the eurozone.

“The whole ‘surrounding pressure’ issue has gone downhill,” said Adam Cole, head of forex strategy at RBC Capital Markets.

One of the best-performing G10 currencies this year, the euro rose more than 1.5% to $1,087.