The broad logic behind this is that everybody knows the country is in a dire financial situation and things may well get lot worse before they get better, but only in Greece itself rather than the eurozone as a whole. The dreaded 'contagion' can be avoided, many say.
“As largely expected, Syriza has emerged as the largest party in last night's Greek elections,” said Paras Anand, head of European equities at Fidelity Worldwide Investment. “Its mandate from the electorate is in essence, to renegotiate the terms of membership with the eurozone and free the economy from a seemingly endless period of contraction through restructuring its debt obligations.”
“Whilst I would imagine that much will be made of a renewed threat to the euro project as a result of this outcome, I would argue that there are reasons to believe that the impact for European investors and even for economic growth across the region may be more modest than feared,” Anand added.
“Whilst the cumulative impact of almost five years of genuine austerity has provided the wave upon with ultra-left-wing party Syriza has won the election, the weight of opinion within the nation remains behind the euro project,” said Kevin Doran, Brown Shipley CIO.
“Though the market impact of a Greek exit could now be contained, the consequences of casting out the people of the Hellenic Republic would prove catastrophic for them and an unnecessary social experiment, designed solely for the purposes of making a point of principal,” he added. "Instead, the more likely outcome ought to display echoes of the debt restructuring that took place within Detroit. A combination of some forgiveness, structural reforms on social care and the ability to repay over a protracted period of time would allow the nascent recovery to take hold, before the future inflation resulting from the ECB's QE programme helps with some of the heavy lifting.”
It could easily be viewed however, that the market reaction screams complacency, and investors have had their judgement clouded by the Mario Draghi’s bold announcement of his grand €1.1trn QE plan last week.
Financial crises tend to develop in a domino effect with it just taking one piece to fall to set everything in motion. An unexpectedly belligerent attitude from the new Greek government in its talks with the ‘troika’ could be that first domino.
New Prime Minister Alexis Tsipras has made positive noises about keeping Greece in both the European Union and the single currency bloc but if he is given short shrift by Draghi, Angela Merkel and co this could quickly change. Whether he would be prepared to go back to his people with nothing but a scolding ringing in his ears and sell them a slightly modified version of ‘austerity’ is very questionable.
The risk is clear. Nobody has any idea how an exit from the euro by Greece would actually play out because there is no direct precedent. The exposure of Europe’s major banks to Greek debt is also very murky, and nothing can be guaranteed in terms of what the fallout would be if it defaults on its €316bn in public debt or exits the euro.