Greek stocks took
their worst beating since the height of the eurozone crisis on Wednesday. The
country's 10-year borrowing costs shot up by more than 80 basis points to 7.85
percent. News out of Greece helped pull down European stocks across the board.
So how bad is it? What follows are three important questions that investors
will want answered.
Greek banks are likely to be forced to raise
more capital in light of the AQR—the Asset Quality Review, which is underway in
Europe and whose results are due on Oct. 26. Banks make up roughly 50 percent
of the weighting of the Athens Stock Exchange, a much higher percentage than
any other in Europe, so a decline in the banks leads to a disproportionate
decline in the index.
As for Greece's socialists, new
polls—including one out on Tuesday—show they are leading other parties ahead of
the country's next elections. If far-left leader Alexis Tsipras becomes prime
minister, he promises a showdown with the European Union over "the
program"—austerity—that Greeks have been living with since 2010, in exchange
for a huge financial bailout.
Which brings us to reason three: the end of
the bailout program. The part of the Greek bailout program from the European
Commission ends this year; the International Monetary Fund's portion of the
program ends in a little more than a year. Greek Prime Minister Antonis Samaras
wants to exit the program early, ahead of a key election in February, so he can
campaign on giving Greece its sovereignty back. His argument is that Greece can
borrow from the market rather than from the hated "troika"—the
European Commission, IMF and European Central Bank. But borrowing from the
market is much more expensive than borrowing from the troika, 7 percent versus
1 percent. Greek yields are rising, suggesting bond investors don't like the
idea of Greece losing the troika yoke.
If Greek yields are rising, could Greece
default again? Highly unlikely. Although Greece still has a lot of debt, most
of it is deferred debt, and remaining interest payments are extremely low.
Beyond that, most of the debt is owed to other governments, not to banks, so
this is no longer a case of Greece bringing down the entire European banking
system—as was feared in 2009, 2010 and 2011. It could, however, lead to German
taxpayers losing money if Greece is allowed to extend maturities or pay even
lower interest rates.
However, the bond market also may be pricing
in the fear—once again—that Greece could leave the euro common currency zone. Could
Greece still leave the euro? Short answer: Yes. Longer, more nuanced answer: Possible, but not
probable. Here's the logic: There is a presidential election in Greece in
February. Key question: Can current Prime Minister Antonis Samaras get the
votes he needs—180—in order to get his presidential candidate elected?
If Samaras fails, it could lead to snap
elections, perhaps as early as June. If the election were held now, polls
suggest leftist Alexis Tsipras would win. Tsipras says he wants Greece to stay
in the eurozone, but only under certain conditions: debt forgiveness and a
reversal of some reforms designed to make Greece's economy more competitive.
But those conditions conflict with staying
in the eurozone. Fears of a possible euro exit may also be pressuring the banks,
because a euro exit would mean almost certain bankruptcy for Greek banks.
(Πηγή: cnbc.com)
