Greece Elections: Tragedy for the Euro?

Sendero Wealth Management News

Greece looks to be on the verge of an exit from the EU. It’s only been two years since the country was the recipient of a German-led bailout effort that saw the ECB buy Greek government bonds under the pretense that Greece adhere to fiscal reforms (otherwise known as austerity). After a few years of living with financial restraint, Greece’s economy is still faltering and its debt to GDP ratio is the highest that it has ever been. Simply put, Greece is no better off today than it was back in 2010.

The country’s fate could be decided at the snap elections that are being held on January 25th and the debt crisis is once again front and center in the news. The political party that looks favored to take control of the Greek parliament is the left-winged Syriza, and the party has already made it clear that they no longer want to live in austerity. Many expect Greece to leave the euro zone if Syriza wins the elections, as Greece’s creditors don’t seem interested in offering loan forgiveness that Syriza will be seeking. This election is also being viewed as a test case for countries like Spain, where another left-winged party is quickly growing in popularity and could also challenge the current government in place. If Spain were to move in the same direction as Greece, then the euro zone would have a much larger problem on their hands.

Greek meltdown from 2010?

Though the situation seems similar, this time around it’s a much different ball game. Despite slow economic growth throughout most of Europe, euro zone countries are now in a much more stable situation to handle a key country’s departure from the euro zone. In 2012, the possibility of a Greek default threatened to incite widespread panic and damage to the European financial system. Now, European bankers and investors aren’t strapped to Greece after unloading a lot of Greek debt with the majority of it going to euro zone governments. With a 500 billion euro backstop, these governments are much better protected from a Greek default than they were back in 2012. While no one is hoping for a Greek exit from the Euro, the situation surrounding the current Greek crisis is much different than it was back in 2010 and euro zone countries will not be as reluctant to let Greek abandon the Euro.
What to pay attention to

The European economic landscape could drastically change in the next few weeks with the ECB meeting on January 22nd to determine QE measures, and Greece’s elections on January 25th. With the Euro at its weakest value against the dollar since 2006, there isn’t much room for error and the ECB knows this.  A fleeing Greece could put the Euro in to doubt for many investors. One thing is for sure; by the end of January we should all have a better idea of whether or not economic stability in Europe is on the horizon for 2015.