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 leftist 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."
Carlo Messina, chief executive of Italy's Intesa Sanpaolo SpA,
said in an interview that he isn't worried about any market fallout
from the vote. He said the ECB's plans for quantitative easing will
provide breathing room for markets and introduces the possibility
of a modest debt restructuring that would avoid a Greek exit from
the eurozone. "I don't think this will be a major point," he said
of Sunday's elections.
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 2 1/2 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 toward 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 2 1/2 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 damaging exit from the euro
is not out of the question," he added.
Mark Burgess, chief investment officer of Threadneedle
Investments, warned, "If Syriza does not cooperate, Germany may
feel that it can ask Greece to leave the eurozone."
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