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Greece’s Election and Your Portfolio

Greece holds a national election on Sunday that is widely seen as a vote on whether it will remain in the euro zone. U.S. investors may have more at stake in the outcome than they think. In the short term, an unexpected outcome could sway portfolio values by 5% or more in either direction, according to a Thursday report by Bank of America Merrill Lynch.

The contest is between the far-left Syriza party, which has said it will reject the austerity measures Greece agreed to as part of past bailouts, and the center-right New Democracy party, which would leave the measures largely intact. If the new Greek government rejects the austerity measures outright, the country’s creditors would likely withhold future bailout funds, leaving the nation with little cash and likely forcing it from the euro zone.

No opinion poll results have been released since June 2, in keeping with Greek law, but a massive 10% rally in Greek shares on Thursday could signal that investors believe the country will form a pro-euro government.

But such an outcome might not produce the biggest gains for investors in coming weeks, oddly enough. By BofA’s reckoning, the most bullish outcome is that Greece fails to form a pro-euro government, resulting in a decisive response from the European Central Bank. That could include an interest rate cut, large bond purchases designed to push rates lower and a new program to guarantee bank deposits across Europe, or to recapitalize struggling banks.

The probability of all this is “low”, but it could send the S&P 500 index 5% to 10% higher in a month, according to BofA. The 10-year Treasury yield would jump to 2.1% from its recent level of about 1.6% as investors left safe havens for risky assets.  Gold would shoot to $1,700 an ounce from about $1,620 on anxiety over all that money-printing. Among the best places for investors to be would be European bank shares.

Only slightly more likely is the worst-case scenario, which consists of the same election outcome minus the policy response. Stocks and gold would shed around 5% within a month, and a rush for Treasurys would reduce the 10-year yield to a record low of 1.3%.

The most likely outcome, according to BofA? Greece forms a pro-euro government and sticks to its austerity program, and the policy response is limited.  Any rally in stocks is sharp but short-lived, as investors quickly turn their attention from Greece’s euro membership to wobbly Spanish banks and the weak European economy in general.

In other words, under the most likely scenario, the investment landscape looks pretty much the way it does now, for better or worse.


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    • good article pointing to the different and difficult scenarios facing investors in the coming days and weeks…tbc

    • No one listens to BA anyway.

    • @Marketwatcher
      The article hedges everything it says. No one knows how this will play out but my guess is Greece leaves the Euro Zone and defaults on existing loans and prints Drachma’s to cover internal costs without the ability to do much importing.

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