Greece is back on top of the international economic and political agenda after a brief respite. How can you build a firewall around your portfolio to insulate yourself from the big fat Greek mess?
The immediate question is: Who’s going to lead Greece out of this crisis (or into a worse one)?
Worries that a new government led by the left-wing Syriza party could lead the country into rebellion against measures designed to make sure that it stays in the euro zone have sent European markets down this week. Syriza’s leader,Alexis Tsipras, has won votes railing against austerity measures imposed as part of Greece’s bailout by the international community, and some analysts are worried that he will try to tear up the existing agreement, leading to Greece defaulting on its debt and crashing out of the euro – which could lead to contagion in other larger economies.
Tsipras may not be the threat many in the markets fear. Parties labeled as extreme often become more pragmatic once they are in power. The election of nominally socialist Francois Hollande in France has not yet heralded the drastic changes to French policy feared by many in the markets. There will be some relaxation of the terms of the Greek bailout no matter who gains power in June, Credit Suisse’s head of research Giles Keating believes.
One thing investors can bet on is that Greece will continue to face more of the economic downturn that has affected it in recent years. “Recession is inevitable in a country that has been consuming with borrowed money for decades,” Miranda Xafa, president, EF Consulting and a former board member for Greece at the International Monetary Fund, warned in an interview on CNBC’s “Squawk Box Europe” Friday.
After the election, the next big issue is whether Greece can stay in the euro. Analysts and economists are split on this question. Respected Citi Chief Economist Willem Buiter predicted that Greece will leave the euro zone next year and the country's new currency will "immediately fall by 60 percent," in a research note that spooked markets Thursday.
On the other hand, Credit Suisse’s Keating argued Greece will stay within the single currency.
“Everyone has to ask themselves what does a Greek exit actually mean? I think it means the European Central Bankcutting Greece off and cutting Greek banks off from the euro zone payments system,” he told CNBC Friday. “It’s only going to do it if the political leaders tell it to, and they’re only going to do that if they think they can do it in a way that won’t create a domino crisis.”
“There is support for Greece on a daily and ongoing basis. As people withdraw money from Greek banks, the ECB are supporting them,” he pointed out. “The ECB has already bent over backwards to be as flexible as possible to keep Greece in.”
The consequences of exiting the euro could be catastrophic for Greece. “There will be economic chaos and uncontrollable social explosion,” Xafa warned.
“People will lose their savings – they will be worthless,” he said. “The government would have to balance the current account deficit and the budget instantly, which would mean they couldn’t import necessities.”
There is also an emerging school of thought that an exit does not have to be disastrous if it is managed and supported byother euro zone countries and the troika funding Greece's bailout.
“The short-term consequences (of a Greek exit) need not be catastrophic, particularly if Greece received financial support from the euro zone or EU during the transition,” Ben May, European economist at Capital Economics, wrote in a research note.
He conceded that there would definitely be “extreme disruption” if Greece left the currency, but argued that a default by the government could reduce Greece’s debt burden.
There is also the problem that taxpayers elsewhere in the euro zone may not want to continue to support Greece financially if it is no longer part of the currency.
Xafa argued that if Tsipras wins, he wouldn’t have the “bad sense” to take Greece out of the euro area. “He knows that would be political suicide, because most Greeks want to stay in the euro area,” she said.
If the Greek situation worsens, other peripheral euro zone countries will start to look more worrying, however, with Spain and Italy likely to be the next focus for the bond markets.
“If the Greek situation becomes extremely unstable, then the securities market program of buying Italy and Spain’s bonds would have to be reactivated,” Keating warned. “If not I think they’d shy away from it – the Bundesbank doesn’t like it.”
The single currency itself is also tipped to continue its slide until the markets believe there is a credible solution to the debt crisis. The euro recently hit a two-year low against the dollar.
“All the signs are for a short euro trade,” Elsa Lignos, G10 Currency Strategist, RBC Capital Markets, told CNBC Friday. “I don’t see how we can draw a line underneath this at any time in the near future.”
Investors should start looking for entries into emerging markets – particularly in China – if Greece continues to drag down European markets, according to Keating.
There isn’t a direct connection between the price of oil and Greece, which is a relatively small consumer in global terms. However, as John La Forge, commodity strategist at Ned Davis Research Group, told CNBC Friday, oil has gone down in recent weeks as stock markets are hit.
He believes that other major commodities like gold will benefit from their safe haven status if the turmoil continues.
“Commodities have become a risk trade and the correlations between them are becoming closer,” he said.