Many global investors limited to investment grade markets or developed markets, as defined by MSCI have no direct exposure to Greece. Nevertheless, recent developments in Greece are worrisome to investors. Many fear that the political challenges in Greece could lead to its ultimate exit from the monetary union and default.
This concern has led dramatic loss in Greek bonds and stocks. Today’s decline in Greek stocks (10.2%) is the largest since 1987. The 70 bp rise in the benchmark 10-year yield is among the largest of the year.
There have been a sequence of three issues that have forced the issue to the fore. First, over the weekend, the Greek Parliament approved the 2015 budget by 155-134 votes. The budget was opposed by the official creditors, the Troika (the IMF, EU, ECB), which had been seeking another 1.7 bln euro in budget savings. The government’s budget went the opposite direction. It included relief from the tax on heating oil and the income tax surcharge. It assumed growth would be just shy of 3.0% next year.
Second, the eurozone finance ministers blocked efforts by Greek Prime Minister Samaras to exit the assistance program. Samaras was eager to exit and restore some of its sovereignty ahead of what will likely be elections in the early part of next year. Instead, a two month extension of the existing program was granted, pending final approval. This would be followed by a precautionary line of credit from the ESM. This may force the Greek government to amend its budget before the EU grants its necessary approval.
These two developments set the backdrop for the third. Samaras has brought forward the selection of next Greek President. This was expected next February. The issue is that to select the President, a super-majority in parliament is needed. The government commands 155 votes of the 300-seat chamber.
The first round will be held December 17. The presidential candidate needs to secure 200 votes. If that fails, which is most certainly will, a second round will be held five days later on December 22. If the candidate fails to secure 200 votes then, a third round will be held a week later. On the third try, the candidate needs to secure 180 votes. If this fails, general elections will be held. The anti-austerity, and at times, anti-EMU Syriza Party is ahead in the national polls. Hence the existential concerns.
