Blog: Greek election and Australian impact

We should know just before the end of Monday’s trading day who won the Greek election and gain a better understanding of whether the country will keep or dump the euro currency.

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There has been a two- week blackout, so there is no recent indication of which party is likely to win, however, earlier polls suggested 78 per cent of Greeks want to still stay in the euro.

For global investors, they’d prefer a straight pro-austerity New Democracy win, which would push through the necessary changes for Greece to continue receiving financial aid, although that straight out election win, may not happen.

What’s more likely, is that the party may get the largest percentage of votes, but not the 151 seats needed to form an outright government. New Democracy would then be asked by the President to form a government by reaching out to other parties, preferably with PASOK which is also pro-bailout.

What the markets won’t want to see is the potential for another election, likely in July or August, which may happen if New Democracy still doesn’t reach 151 seats, even with minority support. That’s because uncertainty would continue, and if there is anything investors don’t like and often use as an excuse to sell their holdings, is uncertainty.

A straight Syriza, anti-austerity win is being seen as a low possibility, although the European Union may renegotiate the bailout terms because it would be just too costly to have Greece leave the euro. On the off chance Syriza will stick to its guns, and not negotiate, it would open the path for a Grexit.

What would likely happen is the EU and IMF would stop funding Athens. The IMF does though, have a fund to bail out non- euro member countries, but that would require further negotiations. That in turn would force Greece to print its own currency, the New Drachma, to pay their loans.

However, the currency would likely immediately depreciate, some predicting as much as 70 per cent.

That would send the country into economic ruin, in the short term.

To get there though, the new anti-austerity government would have to leave the euro in secret, and freeze ATMs and bank accounts. It would be an attempt to prevent Greeks from withdrawing their savings from Greek banks en mass, to either hold physically as cash, or deposit in other European banks to prevent the immediate depreciation.

But Greeks are already taking action, ripping their cash from banks. If it continues to happen, a new banking crisis would emerge resulting in Greece defaulting on its debts.

Shane Oliver from AMP Capital predicts an initial GDP slump of around 15 per cent, pushing unemployment to more than 30 per cent.

The European public sector would also lose out, because of its $380billion exposure to the country.

Even worse, is the threat of contagion, a sense of, if Greece can exit, so can other nations.

Portugal, Ireland, Spain and possibly Italy could be at risk.

So how does all of this impact Australia?

Firstly, it will affect Chinese confidence which in turn impacts demand for Australian commodities; secondly bank funding, potentially driving up interest rates locally as wholesale funding costs rise; and thirdly falling sharemarkets.

The irony is that a Greek exit may, in the long term be good for Greece. Despite the potential of years of recession, and possible social unrest early on, a lower currency would give it a competitive edge in the following decade when it comes to exports, and its biggest contributor to growth, tourism would boom for the simple fact, it would be dramatically cheaper to holiday there.

We will get a clearer indication at the beginning of next week as to the future of Greece.

IG Markets says the Greek polls will close at 2am on Monday AEST, with the first official projections expected at 4:45am. Two-thirds of the votes should be counted by 8:45am with the final results expected just before the markets close locally, at 3pm.

In the words of a former 2009 Greek Eurovision contestant, one Sakis Rouvas, will it be “This is our night, time for a change baby, get rid of the old, take a hold and be free”, or “Counting down, the night of nights, getting now, to stand and fight, don’t back down, just look within, do it now, I know you will”.

Sorry, couldn’t help myself.

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