With Greece preparing to go to the polls this weekend for the second time in a little over a month, BAML's credit strategy group addresses three potential outcomes of the election on a number of asset classes. While they do have concerns about all of the possible post-election scenarios they do not necessarily lead to an exit from the eurozone, at least not in the very short term, and some of them could even lead to an initial market rally that could temporarily strengthen the euro. Their analysis focuses on the near-term (four-week) market implications and assumes that neither Spain nor Italy will have a sovereign crisis during this time frame, though those concerns will likely persist.
The three scenarios are:
- Base case (high probability): election result allows Greece to form a pro-EU government; limited European policy response;
- Bull case (low probability): election result means Greece does not form a pro-EU government; substantial ECB & European policy response; and
- Bear case (low to medium probability): election result means Greece does not form a pro-EU government; limited ECB/ European policy response.
The one-month asset price response for rates, credit, equities, FX & commodities are detailed below.
Background on the election
For a new government to exist, it needs to have at least 151 of the 300 seats in the Greek Parliament. The difference between New Democracy and Syriza is still within the margin of error generally attributed to the opinion polls. The party with a plurality of votes gets a bonus of 50 seats and the remaining 250 are distributed proportionally to the percentages obtained between those parties that received at least 3% of the vote. Therefore, the outcome is dependent the party that comes in first, the number of parties that get into Parliament with at least 3% of the vote and the percentage that each party achieves.