In Greece, a controversial election does not preclude compromise

The euro crisis has entered a potentially dangerous phase, and Greece is in the middle of it once again. Investors are nervous following the better-than-expected election victory for Syriza, an anti-austerity coalition that has expressed discontent with Greece’s role in the European Monetary Union as well as its approach to fiscal policy. (Syriza, together with the Independent Greeks party, will likely join to form a government majority on February 5.)

Despite such frictions, we don’t see a so-called “Grexit” as particularly likely. We believe the more probable outcome will be a compromise between the Greek government and the so-called troika (consisting of the European Central Bank, the International Monetary Fund, and the European Commission), entailing reform efforts and some type of debt relief.

A couple of side notes to keep in mind: (1) We believe it’s probable that the expiration date of the existing bailouts (set for Feb. 28, 2015) may be pushed out toward the end of June, subject to liquidity support from the ECB; (2) Despite the new coalition’s common stance against austerity, there is a significant gap between the two parties in terms of social issues, foreign affairs, and civil liberties.

The election results marked a major turning point for European sovereign debt markets. Certainly, this is just the first inning, and it remains to be seen if conditions will improve or deteriorate.

The views expressed represent the Manager's assessment of the market environment as of January 2015, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject to change without notice and may not reflect the Manager's views.

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