By Juliet Samuel
As Greece goes to the polls Sunday, investors are bracing for a
volatile reaction in markets. But some analysts say the wider
impact is likely to be contained.
The results of the vote are all-important for the future of
Greece, but their broader effects will be cushioned both by
Greece's isolation from the euro-zone financial system and by the
massive program of bond-buying launched by the European Central
Bank on Thursday, said Lucy O'Carroll, an economist at Aberdeen
Asset Management.
"The contagion is not completely gone," she said. "But it is
reduced."
Analysts at AXA Investment Management said markets could be
volatile in the aftermath. "The uncertainty caused by negotiations
between Greece and international lenders is likely to take its toll
on risk assets, in the euro area at least."
But they added that even if the radical left Syriza party wins
on Sunday, Greece's elections are likely to have either a
"marginal" effect or "no material impact on the rest of the euro
area."
Markets in Europe are still digesting the full impact of the
ECB's announcement of quantitative easing which itself came just
days after the Swiss National Bank shocked markets by removing the
Swiss franc's cap against the euro, sending the single currency
plunging in the days since.
In the two and a half years since Greece's government last
collapsed, Europe's banks have slashed their exposure to the
country's banks and sovereign debt and the region's other
struggling economies have made significant steps towards
stability.
Greece's borrowing costs have decoupled decisively from those of
Portugal, Ireland and Spain, which recently reached record lows
even before the ECB announced it would start monthly purchases of
EUR50 billion ($56 billion) in sovereign bonds.
By contrast, markets are still demanding a yield of 10% to lend
to Greece for two and a half years, whereas its 10-year bonds are
paying yields of around 8%. Markets often charge more to lend
short-term when investors are worried about the prospect of a
default.
Markets shouldn't write off the possibility of some contagion
from Greece, said Peter Westaway, chief economist at Vanguard Asset
Management in Europe. "Greece is still a little bit ringfenced now
[but] there's almost a complacent view that Greece is completely
off the radar, " he said.
A spokeswoman for Syriza denied that any victory by the party
would be taken badly by markets. "Our victory will mark the
beginning of a different era, for the whole of Europe, in which
economic growth and development will take the place of austerity
measures," she said.
Opinion polls indicate that Syriza is likely to win but without
enough votes to form a parliamentary majority. Assuming it can form
a coalition with another like-minded party, negotiations over the
terms of Greece's bailout with the country's international lenders,
the European Commission, the IMF and the ECB, could drag on for
weeks. If Syriza can't form a government, new elections will have
to be called.
Greek stock markets benefited from the ECB's decision to start
quantitative easing last week, despite a warning from ECB president
Mario Draghi that Greek government bonds wouldn't be eligible to be
bought by the ECB until negotiations between Athens and its
international creditors reach a satisfactory conclusion. Shares in
Greece's biggest banks rose by between 6% and 14% on Friday.
Write to Juliet Samuel at juliet.samuel@wsj.com