There are 300 seats up for grabs in Greece's election on Sunday, of which 151 are needed to form a government. The leading party gets a boost of 50 seats. In the run-up to the election, support has become polarised between New Democracy and Syriza.
There are three possible outcomes: The first, a New Democracy-led coalition with Andonis Samaras as prime minister; second, a Syriza-led coalition with Alexis Tsipras as prime minister; and third, that no party is able to form a government and further elections are scheduled.
How do New Democracy and Syriza differ in their policies?
Both parties agree that Greece should stay in the Euro, as do 85 per cent of Greeks, and that the austerity package needs to be renegotiated.
Syriza wants a three-year debt moratorium and has threatened to repudiate all government debt. New Democracy favours a more constructive engagement with the EU, pushing back austerity targets and further EU subsidies.
Syriza also wants nationalisation of banks, expropriation of all bank deposits above €20,000, an increase in corporate tax from 20 to 40 per cent, an increase in unemployment benefits and the minimum wage, to reduce VAT, remove tax exemptions for ship owners, reverse privatisations (including Hellenic Telecom, owned by Deutsche Telecom) and hire an additional 100,000 civil servants.
What is the immediate economic impact of a Syriza victory?
A Syriza government is likely to see an intensification of outflows from the Greek banking system, increasing its reliance on ECB funding.
Greek bank deposits have reduced by €80bn since 2012, from €240bn to €160bn, with recent reported daily outflows of €100m-€500m.
This compares with €280bn of bank assets, which means the ECB will have to fund a gap of €120bn to prevent Greek banks going bust.
Greece would only leave the euro if the ECB refuses to allow Greek banks access to euro liquidity through the euro system. The ECB is only likely to do this if directed by the EU.
What happens after that?
Any Greek government formed will want to renegotiate the austerity plan, but EU leaders are likely to be willing to make limited concessions.
If the new Greek government cannot agree a revision of the austerity programme with the EU, a prolonged impasse is the most likely outcome.
Rather than Greece leaving the euro, Greece would operate with a parallel currency for domestic transactions, keeping the euro for international transactions.
This would accelerate internal devaluation of Greece, and may after an initial acceleration of pain, return the economy to a growth trajectory. On the other hand, Greece’s ability to repay euro-denominated debt would be further questioned.
Whoever wins the election, Greece is still unlikely to leave the euro, and in any case the effects of such an event could probably be contained. The risk is in the contagion effects.
What does this mean for investors?
A New Democracy victory is likely to be viewed positively, while Syriza would increase fears. We think the market reaction will exaggerate the extent to which the Greek elections are a binary event.
There is likely to be no quick resolution to the eurozone crisis, but it should be manageable, barring unintended consequences.
Risk-free assets such as US Treasuries, Swiss, German, and UK government bonds have never been more expensive versus risky assets, so it is fair to say that there is a lot of bad news priced into financial markets.
However, this does not necessarily mean that all risk is cheap, and we would continue to avoid southern Europe and eurozone banks, until a road map to a permanent solution is in place. There are enough cheap stocks in Europe elsewhere.
We think investors should ignore the noise of the Greek election and focus on stocks likely to be able to grow profits and pay dividends in a continued difficult macro environment.
We favour blue chip stocks, with high returns on equity, significant dollar exposure, little to no debt and solid dividend yields.
Moreover, these high quality stocks in Europe can be bought for the same price as low-quality stocks elsewhere in the world.
Whatever the outcome of the Greek election, these opportunities are likely to remain Europe’s key attraction for investors.
FE Alpha Manager Barry Norris heads up the FE five-crown rated Ignis Argonaut European Alpha fund. The views expressed here are his own.