Latest Greek poll act unlikely to spark full drama

GREECE, never short of drama, has launched into another act.

Greece 10-year bond yield

GREECE, never short of drama, has launched into another act.

After Prime Minister Antonis Samaras failed in the third and final vote on Monday to gain support for the government’s presidential candidate, Stavros Dimas, a snap general election will be held on January 25. Investors elsewhere in the eurozone should brace for greater volatility. Severe disruption is less likely, though.

Only 168 parliamentarians voted for Mr Dimas, 12 short of the number required to approve his candidacy. The Athens stockmarket fell more than 10 per cent on Monday before staging a recovery; 10-year Greek bond yields rocketed to 9.3 per cent.

Yet, while Italian and Spanish bond yields also rose, their move was fairly limited. Greece is now the clear outlier in eurozone government bonds; yields elsewhere have fallen to record lows.

The Greek election campaign seems likely to provide plenty of headlines that could roil markets. The race looks like a close one. While polls put the left-wing antiausterity Syriza party in the lead, New Democracy has been closing the gap.

Intense focus will be put on Syriza’s call for a restructuring of Greece’s debt, although party leader Alexis Tsipras says he intends to honour the country’s market obligations and International Monetary Fund loans. But with the Greek yield curve already inverted — its three-year bonds yield more than 10-year bonds, a classic sign of distress — a lot of bad news is priced in already.

For other eurozone bonds and stocks, election rhetoric from the parties is likely to provoke only knee-jerk moves, unless the risk of a Greek exit from the euro starts to rise. But a majority of Greeks still back the euro.

Meanwhile, for the rest of the eurozone there is a much bigger actor waiting in the wings: the ­European Central Bank.

Although it isn’t a done deal, the ECB may yet buy eurozone government bonds in an attempt to combat ultralow inflation. That is likely to provide an anchor for bond yields outside Greece. Any talk of a Greek debt restructuring would be a reminder of the risks around eurozone quantitative easing and an illustration of how it differs from the bond purchases undertaken by the US Federal Reserve or Bank of England. But Greek bonds were always going to prove a contentious issue for the ECB in designing its program.

It will pay to watch developments in Greece closely, though more because of how they may influence debates elsewhere. With elections due in Britain, Spain, Portugal and Finland next year, and new parties making a name for themselves, Greece’s political drama isn’t the only one that will keep markets guessing, and vulnerable to surprises.