Too Early for Champagne In the Euro Zone: Pro
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It's probably been a while since you've heard much talk about a Grexit.
Grexit, short for Greek exit, was the term in heavy use last spring and summer when investors were most worried that Greece would default on obligations and exit the euro zone in an abrupt, messy fashion. What with pledges from European Central Bank Chief Mario Draghi and the release of another tranche of aid to Greece, the risk of that particular kind of mess is greatly diminished.
But if you're thinking of popping open the champagne, hold off, said Jens Nordvig, head of fixed-income research, Americas, and global head of FX strategy at Nomura Securities.
"Political risk remains a serious concern, and this risk cannot be addressed through liberal liquidity provisions" like the stimulus efforts by the European Central Bank, he wrote in a note to clients. "Moreover, continued weak growth in the region has the potential to fuel populist sentiment, implying that political risk may be rising."
The political risk extends while beyond Greece: Regions in Spain have held votes on independence, and in Italy, elections are looming in early 2013.
Can this political risk hurt the euro and other euro zone financial assets if the prospect of a messy default has diminished so sharply? You betcha.
"Since political risk is hard to quantify for investors, this creates a persistent sense of unease," Nordvig said. And that, he said, is bad news for traders. "The implication is that Eurozone financial assets will continue to embed significant risk premiums in 2013 and beyond."
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