Tense wait for investors as Greeks face 'euro vote' Tense wait for investors as Greeks face euro vote

Saturday 26 May 2012

FORMER British prime minister Harold Wilson once said "a week is a long time in politics", but for Europe and global investors generally, the next four weeks are going to seem like an eternity.

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FUNDAMENTALS MIKE TURNER FUNDAMENTALS MIKE TURNER

The next round of elections in Greece on June 17 are now a focal point, with some billing them as a referendum on the country's membership of the eurozone. Whether it is or isn't, what is now clear is the idea of a Greek exit is at last being taken seriously. Previously, policymakers throughout Europe dismissed the potential of Greece leaving.

Opinion polls currently indicate 70% of Greeks are still in favour of the eurozone despite the harsh austerity measures they have had to endure. This suggests there would need to be a massive swing in support to small political parties, such as Syriza, which wants to tear up existing bailout terms, for a mandate for Greece to leave the euro.Even if this were to happen, there is no roadmap on how exactly Greece would exit but it might be in the face of default, leading to a reintroduction of the drachma. This would be devastating for European banks, Greece's biggest creditors, who would then take a haircut on their holdings. Capital flight is already occurring from Greek and other European banks and capital controls are a very likely consequence. In extremis, a wholesale nationalisation of major parts of the banking system may be the only route to preserving financial stability.Furthermore, other European countries such as Spain and Portugal would come under pressure and could be pulled into even deeper recession. Ultimately, an exit of the euro might give peripheral countries a better opportunity of returning to long-term growth, but at the expense of considerable short-term pain.One alternative to an exit – orderly or otherwise – is if Germany could be persuaded to guarantee Greek debts via "mutualisation". Then, goes the argument, Greece could muddle through if the European Central Bank implemented further standard and non-standard measures, such as long-term refinancing operations. Confidence would be restored and Greece's exit avoided. However, such a plan would be hard to sell to domestic voters elsewhere in Europe, such as in France and Germany, who are already feeling the pain of austerity and don't understand why they should bail out the Greek economy again.So the views of voters, not only in Greece but throughout Europe, are likely to play an influential role in the coming weeks, and social stability will be an important topic in the minds of politicians. For now, markets will continue to be volatile, trading on the daily flow of political soundbites coming from Athens, Berlin, London and Paris.Mike Turner is head of global strategy & asset allocation at Aberdeen Asset Management

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Tense wait for investors as Greeks face 'euro vote' Tense wait for investors as Greeks face euro vote

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