Global Macro Alerts™ – Greek Political & Economic Outlook

The recent arrest of the ultra-right Golden Dawn party leaders was sparked when a member of Golden Dawn murdered an anti-fascist rapper. The group had previously enjoyed impunity partly as a result of being the third most powerful party. Recent opinion polls recently giving them about 10% of the vote. Prior to the crisis, they had less than 1% of the vote.

Antonis Samaras, the Greek Prime Minister, acted swiftly against Golden Dawn. His actions have been praised by the media and legislation is being considered that would cut funding for this party. In fact, the Minister of Public Order has kept a close watch on Golden Dawn with and has accumulated hundreds of case files into apparent ‘criminal activity’ covering murder, attempted murder, violence, money laundering and blackmail.

Why did the Greek government delay taking action until now? Why was Golden Dawn allowed to act with such impunity and negatively damage the image of Greece?

The reason lies in the fragile coalition politics of Greece and the possibility that some supporters of the ultra-right Golden Dawn party could be lured back to the center. Many supporters of Golden Dawn are backing the party mainly for economic reasons.

Press images of Golden Dawn members handing out food and other essentials in very poor and economically deprived neighborhoods painted a picture that they were helping the forgotten members of society. However, only citizens of Greek ethnic origin were given handouts by the ultra-right members of Golden Dawn. In the same neighborhoods, thugs of the party attacked immigrant owned shops and individual immigrants accused of criminal activity. Of course, most of these actions were motivated by their odd racial and xenophobic rhetoric. In short, they were acting as the policeman, judge and jury without any authority. The police and the government stood back and watched. This inaction by the authorities gave Golden Dawn credibility of the eyes of voters living in those neighborhoods. They must have felt that the government had abandoned them while Golden Dawn came to the rescue with handouts and also making their neighborhood safe.

However, this all changed when a Golden Dawn member murdered an anti-fascist rapper. Greek citizens were outraged and protests occurred across Greece. Support for Golden Dawn was shattered. In reality, this support was always weak and mostly based the economic needs of a desperate segment of society.

A golden opportunity was just handed to the current government. The economically motivated supporters of Golden Dawn naturally moved back to the center. The dynamics of the fragile coalition were no longer a restraint and the current conservative government brought about swift action to arrest the party leaders of Golden Dawn. An additional impetus came from their main opponents the far-left party Syriza who had been critical of the government for not acting earlier. Not to loose any political advantage to the opposition, the government acted swiftly.

Political Assessment

I see it as a highly positive development. It could signal the start of less extreme political environment in Greece. The crisis had emboldened the ranks of the extreme parties, with Syriza on the left and Golden Dawn on the right. Both parties expose negative policies for Greece. Syriza, if they gain power, would certainly cut ties with the Euro. Golden Dawn, never had the same support as Syriza, but it is clear that they would turn Greece into a fascist state.

By taking decisive action, the conservative government prevents Syriza from seizing the moment to gain voters and at the same time discredits and puts away Golden Dawn.

Legislation to take away state funding for Golden Dawn means that marginal supporters of the party who mainly relied on Golden Dawn for handouts, would move back to the center. Thus, benefiting New Democracy, the conservative party of the Prime Minister.

A more stable and normal political climate will evolve in Greece. I expect the parties in the center to gain some momentum. This has important implications for all investors since both centrist parties (New Democracy and PASOK) are committed to staying with the austerity program.

Economic Assessment

Greece seems to be turning the corner on the economic front. The country is close to a budget surplus this year. Additionally, the tourist sector had a good season. Discussions are under way to create an entity to manage bad loans and the Finance Minister sees the recession bottoming out. Recently, new car sales have seen a marginal increase, etc.

On the negative side, unemployment is still very high and the economy is still contracting, although at a much slower pace. Without the availability of credit any recovery will be questionable at best, the importance of creating an entity to manage bad loans.

Potential Trading Opportunity

Expect to see some volatility next week as there will be a backlash from Golden Dawn supporters. But I don’t see it as sustainable. As I said before, this is a highly positive development in the political area which will have benefits for all investors.

It is important to keep an eye on the exchange traded fund, GREK, this week to see how the market views this development. At the moment, I would stay cautious but on the positive side.

It is interesting to note the reaction of the market which can be seen in the the 5-day chart shown below. Yesterday, the market was initially negative then positive but then turned cautious. The initial negative and then positive movement shows uncertainty regarding the arrest of the Golden Dawn leaders. What would account for the price turning cautious? Looking at the time frame, I would say it has to do with bad news emanating from the US Government Deficit and the situation in Italy.

 

Source: Yahoo Finance

 

In my opinion, GREK could represent an excellent buying opportunity in the next few days as the US Budget Deficit drowns out any positive news in global markets. Note that if the government shut down continues for a few days to a little more than a week, I think this will force the FED to delay the decision on monetary stimulus till next year. Thus, I think GREK along with other emerging market ETFs could get a boost once we are over the initial shock. If the government shut-down drags on for longer, I would be very cautious.

In the long-term, Greece is still a risky bet. However, I think it is turning the corner and I would employ a trading mentality here rather than a long-term investment strategy. This will probably change as the picture becomes less cloudy over time.

ETF: GREK

NOTE: this article or a modified version has also been published on Seeking Alpha and on Yahoo Finance (ETF symbol: GREK).

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