Three scenarios to plan for as Greece heads to the polls

Uncertainty in Europe is back with a vengeance, and the culprit is one we all know too well. Greece, who has undergone massive austerity reforms in order to maintain its bailout program with international lenders, holds elections on Sunday. Opposition and anti-euro party Syriza is currently ahead in the polls, but 20% of Greeks remain undecided. The results of the elections could accelerate Europe’s slowdown or even prompt the region into recession. While more than 70% of Greeks wish to stay in the eurozone, the country’s political circumstances are unstable, and exit is possible (if unlikely).

Greece is infamous for destabilizing the currency area. FSG thus recommends that companies make assessments about the eurozone’s economic health only after the outcome of Greece’s election this Sunday is clear. FSG identifies three scenarios along which European economics could develop as a result of Greece’s elections.

Three scenarios that could occur as a result of Greece’s elections:

1. BASE CASE: Syriza is elected, and bailout is maintained (60% Likelihood)

  • Scenario: Syriza is elected, and negotiations over its bailout conditions commence. During the bailout process, Greece’s bond yields could rise to 20%. The euro will continue to depreciate. In the medium term, financial markets will stabilize as negotiations are successful. Investment across the eurozone will be even lower than expected as the high and sustained risk profile of Southern Europe weakens confidence.
  • Signpost: Syriza is elected, but not with a full majority. As a result, it is forced to work with coalition partners, which will require it to soften its stance, including on pulling Greece out of the eurozone.

2. UPSIDE: Syriza is defeated, and bailout is maintained (20% Likelihood)

  • Scenario: Greek voters elect a variation of the governing coalition. The euro maintains its value as the euro area’s risk profile relaxes. Investment and demand across the eurozone will still be weaker than if elections had not been prompted in the first place, as Greece’s recovery has been thrown off track by two months of extreme uncertainty.
  • Signpost: Center-right coalition wins election, excluding Syriza.

3. DOWNSIDE: Syriza is elected, and Greece exits the euro (20% Likelihood)

  • Scenario: Syriza comes to power and pulls Greece out of the eurozone. The euro depreciates considerably, and speculation about the solvency of other southern European markets begins to rise. Italy, which has not recovered from recession nor made substantial reforms, could be most vulnerable in this scenario.
  • Signpost: Syriza is elected with a full majority, requiring its leader Alexis Tsipras to pander to the far-left of his own party, which requires exiting the eurozone.

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