Europe Economy

Caution About Greece Returns to the Markets

All eyes are on Greece yet again Wednesday morning after the Greek parliament backed Prime Minister George Papandreou's new cabinet Tuesday in a midnight vote, with some analysts saying much more is needed for markets' confidence to come back.

The former Greek Prime Minister, George Papandreou
Pierre Verdy | AFP | Getty Images

The boost for Papandreou’s government means it is more likely that the country's new austerity package will be approved later on Wednesday, which should restart the flow of bailout funds that are staving off default.

Worries about how far the contagion could spread if Greece defaults on its debt have weighed on the markets in recent weeks.

On Wednesday, European marketsopened down slightly ahead a meeting of the U.S. Federal Reserve, after posting their biggest gain in two months on Tuesday as optimism that Greece will receive a fresh bailout and avoid defaulting spread. The euro lost grounds on Wednesday morning on profit-taking, after the enthusiasm immediately after the vote vanished.

However, it still remains to be seen whether Papandreou can successfully implement his austerity programme, as protestors take to the streets of Athens.

“The important thing is the implementation, and that will become more visible in the next few months,” Michael Massourakis, Senior Manager Economic Research at Alpha Bank in Athens, told CNBC Wednesday.

He added that the first hurdle will be whether the government can reach its target of cutting the budget deficit to 7.5 percent of gross domestic product by the end of the year.

The new Greek Finance Minister Evangelos Venizelos, who was given the job after a cabinet reshuffle last week, has more “gravitas” than his predecessors and should do a good job, Massourakis said.

“Investors will be watching to see whether Greece can bring it to fruition,” he said. “The whole thing will unravel and either we are going to see the collapse of the euro or Europe will have more political integration than we have seen up to now."

One commentator said that the situation may not lead to the financial Armageddon pessimists predict.

“I think it’s actually not that bad,” Edmund Shing, head of European equities at Barclays Capital, told CNBC. “Everyone seems to be obsessed by Greece, but in other parts of the world, and Europe, there are reasons why people have been pessimistic over the last couple of months."

“However, if you look at the backdrop for equities, which is not fantastic this year, not in the first phase of an economic recovery, over the last few months analysts have been revising their predictions up overall,” Shing added.

If the European Central Bank "does something that threatens the euro" we will see a crisis, according to Steve Barrow, head of G10 Research at Standard Bank.

“If people start saying: ‘Will the euro survive?’ then it’s in trouble,” Barrow said.

But the Greek tragedy has been a long-drawn one, according to Massourakis.

“The whole world, and the whole financial market, has been waiting for Greece to default for 12 months,” he said. “At the same time, if Greece proves that it is able to start implementation of the five-year programme of austerity, it will allow government to start coming back into the markets slowly.”

Greece Cannot Avoid Default

The euro is not in as big a danger as some analysts believe, Barrow said.

“There’s not a lot of competition for reserve currencies,” he said.

“I think in this case they don’t have to push so hard as the UK did in 1992,” he said, talking about the UK’s exit from the Exchange Rate Mechanism on what was known as Black Wednesday, when the government was unable to keep the currency above the lower end of the exchange rate's fluctuation band because of speculative attacks.

"We are confident that Greece will find a way of not defaulting in the short term and hopefully we will see some sort of debt rollover, some sort of Vienna Initiative kind of solution as a default wouldn't be very supportive of the periphery," Ana Armstrong, CEO of Armstrong Investments, told CNBC Wednesday. Armstrong believes her investment in short-term Greek government bonds will pay off.

The Vienna Initiative saw a group of about a dozen Western-owned banks pledge to keep their exposure to Central and Eastern European countries during 2009 when they were badly hit by the crisis.

The agreement was reached after the European Union and the International Monetary Fund helped the hardest hit Eastern European countries with funds, which were used in part to boost liquidity for foreign-owned commercial banks in those countries.