But, while markets have not been particularly sanguine in their reaction to the troubles in Greece, many market commentators do not yet place a high probability on Greece leaving the European Union, even if Syriza does come to power.
Investec Wealth’s Darren Ruane told Portfolio Adviser the firm is very much in the ‘muddle-through’ camp when it comes to Greece.
“Even if Syriza wins the election, they are unlikely to hold a gun to the head of Greece’s creditors,” he said, adding that while there remains the question of how one restructures the debt things have changed since 2011.
“The last time the debt was restructured it was the private sector that bore the brunt of it. This time it is the official sector that holds much of the debt.”
And, he added, Syriza’s tone, too, seems to have softened somewhat.
James Sym, manager of the Schroder European Alpha Plus Fund, agrees that the worst case scenario – wherein Syriza is placed in power and maintains its hardline stance is unlikely, putting such an event at a probability of around 10%.
He said, “There remains the possibility that a moderate government is returned to power, and, if that were the case it would mean little change to the current situation. The third scenario, which he feels is the most likely, at around 60% probability, would see Syriza placed in power but softening their view.
“But”, he points out: “currently, bond markets are pricing in about a 50% chance that Greece leaves the union.”
No longer fatal
The other side to this is what an exit by Greece might mean for the broader union. Whereas in 2011, the market worried that should Greece exit, it would result in contagion that would most likely bring down the whole region, now, such fears have receded somewhat.
As Sym explains, the mechanisms that have been put in place by the EU since 2011 mean that if a eurozone country gets into trouble, unless it is one of the really big ones, there is a much lower chance of contagion.
Heartwood Investment Management investment director, Michael Stanes, is slightly less positive on the impact of a Greek exit on the region as a whole, but, he says, for the eurozone itself, things have moved on from 2011.
“While you can’t be sanguine about a Greek exit, the direct contagion risk has diminished,” he says.
What now
According to Stanes, it is as yet too early to call the result of the election, as things are moving very quickly and a lot could still change in the next few weeks. But, he too agrees that Syriza’s tone has evolved since it first rose to prominence.
He adds that, outside of Greek bond yields, which have spiked to over 9%, the EU bond markets are currently showing no signs of stress. But, he says, that could change over the next few weeks, with a widening of the peripheral country debt spreads over German bunds.
In terms of the currency itself, the euro's precipitous fall against the dollar, while impacted by the events in Greece, also has a great deal to do with the strength of the dollar.
And, according to Brigitte Le Bris head of global fixed income and currencies at Natixis Asset Management, another factor in the fall was the recent statistics released by the IMF on global forex reserves.
"The statistics revealed that holdings of euros had gone down significantly, which is an indication that central banks have not been buying euro denominated debt. And, in the future, central banks may not be there to support the euro in quite the same way they have in the past," she said.
And, while she added that a Greek exit would be bad for the euro, it is impossible to tell yet what sort of move one might expect.
Ruane, said, he views the moves on Monday as somewhat of a microcosm of what might happen over the course of the next month, leading up to and through the election.
“We are likely to see an exaggeration of the moves seen today , with both peripheral bond and equity markets under performing,” he said.
However, Ruane cautions: “In an historical sense, I don’t think we have had a political crisis in Europe yet, there has been a great deal of political upheaval but not crisis yet; this is going to be the biggest test yet for the region.”
Over the longer term, however, there are still reasons to be positive on the region. According to Sym, at current levels, European stock markets are cheap on an absolute basis and very cheap on a relative basis and there remain a number of powerful tailwinds at work, such as the continued low oil price, that should help boost growth.
