Markets have been spooked by the possibility Syriza will now have the opportunity to gain power and dismantle the bailout deal which was put in place to keep Greece in the single currency bloc.
Emerging media reports indicating Germany’s patience may be waning and it could be prepared to allow a Greek exit from the single currency have not helped sentiment.
By mid-morning the FTSE 100 had fallen 40 points while the euro was languishing at around £1.19 or $0.78.
The election has been called in response to the failure of bailout-friendly candidate Stavros Dimas to secure a win in the presidential election carried out over the latter part of December.
“Equity markets are scared of the political events unfolding in Greece and the discussion of the country exiting the euro is back in the fold,” said IG market analyst David Madden. “The anti-austerity Syriza party are still leading in the polls, and this could mark the beginning of the end of Greece’s relationship with the single currency.”
According to Madden, while a Greek exit would not be good for asset prices in the short run, a full crash is not likely if the matter is handled well.
“Angel Merkel is coming to terms with the possibility of Greece exiting the euro,” he said. ”During the eurozone debt crisis any talk of a ‘Grexit’ would have sent tremors through the stock markets but a controlled and well managed withdrawal may result in relatively small losses.”
AXA IM’s research team said prime minister Samaras’ attempt to buy time in order to complete reforms and get the last tranches of the loans promised by the ESM and the IMF ‘has backfired.’
Polls suggest the situation remains fluid, however a win for Syriza is the most likely outcome at this point. The AXA team’s ‘baseline scenario’ is that a newly elected cabinet will strike a deal to alleviate some of Greece’s debt and gain access to an emergency credit line to maintain some stabilty.
A more worrying scenario would see Greece becoming ‘non-cooperative’ where an agreement is not reached by mid-2015 and beyond, which would have a spill over effect on markets but not real economics.
The ‘worst case scenario’ according to AXA IM is a Syriza-lead government triggering a default on bonds and forcing the country to leave the euro. In this relatively unlikely scenario European governments and the ECB would need to act to prevent contagion.