Speculation over how Syriza will win debt forgiveness from the eurozone’s other members has led to renewed fears inside Greece, and across Europe, of a ‘Grexit’ – that the country may default on its debt and leave the euro.
However, the future of Greece’s relationship with the eurozone should not detract investors from European stock markets, which are benefiting from the world’s largest quantitative easing (QE) program relative to the size of the underlying economy.
The positive effect of eurozone QE on stock markets is likely to more than outweigh the negative effect of Greece, potentially, being the first eurozone country to leave the single currency.
The Support of QE
In all countries where QE has been tried, stock markets have rallied strongly as banks sell government bonds to the central bank and then hunt around for other financial assets to buy.
To doubt the power of QE to support eurozone stock markets over the coming 18 months is to bet against the financial history of the last six years.
The €1.1 trillion QE programme unveiled by the European Central Bank (ECB) on January 22 is a powerful, positive, force that may help trigger economic recovery in the eurozone and will certainly drive European stock markets higher in the near term.
Where Does the Greece Risk Lie?
The biggest risk to European stock markets investors from the recent Greek elections does not come from holding Greek stocks. Few mainstream Europe funds will have any meaningful exposure.
Rather, the risk is that if Syriza’s demands for substantial debt forgiveness are met, then the euro project itself is in danger of collapse. This is why they will not be met.
There is a rule behind the euro that states that each country is responsible for its own debt. Some in Germany argue that ECB bond buying, and eurozone lending to Greece, already constitute a mutualisation of national debt.
Should Syriza win concessions and be able to right down the face value of Greece’s outstanding debt, with losses absorbed by other eurozone countries, it will alarm creditor countries in the north.
Germany, Netherlands and Finland in particular are in no mood to absorb losses on Greek debt, which will stir anti-euro sentiment in those countries and fuel extremist political parties.
Furthermore, a victory for Syriza will encourage voters in other indebted peripheral eurozone countries, such as Spain, to believe that eurozone bailout agreements can be broken with relative impunity.
The eurozone authorities do not want Greece to leave the euro, and Syriza do not want Greece to leave. But that is what will happen if Syriza does not back down, because no-one in Brussels wants to see a one-off deal for Greece being used an excuse by other indebted peripheral countries for renegotiating their debt.
Although the situation is far from clear, it is highly likely that Greece will stay in the euro, with only a slightly modified debt programme agreed with the eurozone authorities in order to protect Syriza’s pride.
The stakes are too high for the eurozone authorities to concede more than nominal changes to Greece’s debt obligations. Given this steadfast approach, investors in European stock markets should be ignore the noise from Athens over the coming months and instead focus on the uplifting spectacle of QE, when the ECB’s programme gets underway in March.
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