Fisher Investments Editorial Staff
Politics, Emerging Markets

Icarus, Grexit and Other Greek Mythology

By, 01/05/2015
Ratings483.947917

Inside the Hellenic Parliament, where next month’s election winners will take their seats. Source: Bloomberg/Getty Images.

So Greece is in political crisis. Yes, again. Parliament’s failure to back the government’s Presidential pick triggered a snap election, scheduled for January 25, and the anti-austerity Syriza party leads current polling—renewing jitters over bailout bust-up and euro exit. Eek! But here’s a reality check: We’ve been here before, and the last four years have proven Greece is a false fear. For investors, false fears tend to lose power over time—but that folks still pay them heed is bullish.

Greece’s problems first hit in late 2009, and since then they’ve seemingly had a penchant for doing things in pairs. They’ve had two bailouts, two defaults and now two government collapses. Collapse number two comes less than two months before their scheduled bailout exit, nullifying much of the concern about a potential Syriza-led government abandoning bailout commitments. Greece already got its money. There is hardly anything to nullify. The outgoing coalition government was trying to negotiate some new items, like a provisional line of credit and default #3 (relief from bond payments owed to the ECB, but default is default), and a Syriza-led administration might have a harder time getting the troika to agree, but Syriza isn’t anti-euro. Nor are most Greeks. And politicians have a funny way of moderating. Heck, Syriza has moderated since they went mainstream in 2012! Considering they poll below the minimum percentage of votes needed to govern alone, they’d likely have to form a coalition with one of the major parties—and agree to water down their agenda further to form a government. Sorry, but we just don’t see this going the way hyperbolic headlines warn.

On the bright side, hyperbolic headlines do us all a favor. They help keep fear alive, extending the proverbial wall of worry for stocks to climb—just as they have all through Greece’s crisis. False fears aren’t fun to live through. Things can seem really bad! But they’re also sort of a gift. They allow the most dismal expectations possible to get priced in. When reality eventually isn’t so terrible, it’s a positive surprise, which is usually good enough to push stocks higher. Even if the outcome is, in a vacuum, bad! It’s all relative. If bad is way less … well … bad than a disaster markets have already priced, then for stocks, bad is actually good.

That last paragraph is pretty abstract, but Greece provides something of a case-in-point. Throughout 2010 and 2011, most folks were positive Greece would collapse politically and economically, causing the euro to shatter, bringing all of Europe to depression as currencies went haywire, and taking global markets down with it. Headlines fretted this pretty much daily. Don’t take our word for it—Google “Greece collapse” or “eurozone collapse” and you’ll get hundreds of hits. Headlines like the following:  “Greek Default Could Spur Europe-Wide Contagion”; “The Trillion Dollar Question: Will Greece Exit the Euro? ”; “ Funds Flee Greece as Germany Warns of ‘Fatal’ Eurozone Crisis .” Some speculated preparations were being made on the continent, “ If the Euro Collapses, the Swiss Army Is Ready.”

The more stories like this circulated, the more the world feared, discussed and traded on the possibility of the eurozone splintering and roiling the world. Folks made millions upon millions of investing decisions under the influence of deep-seated fear. Markets are forward-looking: They don’t wait for some big bad thing to happen to react. Fear strikes first, folks pre-act. Ergo, widely held fears (or known positives, for that matter) get priced in.

Global markets had some heavy volatility tied to fears of the worst happening in Greece in 2010 and 2011. They got some relief surrounding bailout #1, but things soon turned south again, driving fears even higher. But Greece didn’t collapse and leave the euro! Instead they got bailout #2, which included a default. Bad! But what folks feared was a sudden, chaotic default crushing the euro. The reality of a planned, orderly debt restructuring, though not good for Greece and bond investors, was a welcome relief for markets globally.

Same thing happened when Greece’s last government collapsed in 2012. Then, folks feared the political worst! Syriza was rapidly ascending, fueled by firebrand leader Alexis Tsipras’ anti-austerity rallying cry. Compounding matters, Golden Dawn, a far-right, anti-euro neo-nazi party, was on the rise, too. Even though they were ideologically opposite the leftist Syriza, many feared a bailout-rejecting, reactionary coalition could emerge. Global markets corrected during the campaign, likely in part due to resurgent Grexit fears. The first election was inconclusive, but showed the New Democracy and Panhellenic Socialist Movement (commonly known as PASOK) parties had more support than many feared. Markets rebounded as campaigning resumed before a second vote. In that second round, New Democracy and PASOK got enough support to cobble together a coalition along with a few independents, eventually passing whatever austerity measures were needed to keep receiving bailout money. Reality beat fear. But note again: The rebound didn’t wait for the election to provide certainty. Oh, and Greece defaulted again at year-end—yet stocks yawned. The Greek default story had lost significant power to sway stocks.

Since all that, Greece has done things folks once feared impossible. Like resume growing. And return to capital markets, where it issued debt at modest (by Greek standards) rates—essentially completing its bailout programs. And Greece is still in the euro. Yes, its economy is 25% smaller than its prior peak, debt is still roughly 175% of GDP despite two defaults, unemployment is high and Greece’s economy still isn’t all that competitive. Like we said before, it’s not like any of this was good! But a Greece that’s still in the euro and beginning to crawl back from depression is a better Greece than the world expected once upon a time, and that is enough for global stocks.

And now we have another round of Greek fear, with reality looking quite likely to prove better than most expect. Sentiment has improved some—few suggest this a major global risk now—but fear is out there, and folks are heeding it. That means there is still plenty of room for them to bid stocks higher whenever their relief comes.

 

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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