Even though Greece is teetering on the brink of default, the risk of contagion to other European financial markets is in fact limited, says Colonial First State Global Asset Management (CFSGAM).
CFSGAM, in its recent First Insights report, said that while contagion is unlikely to spread to peripheral economies, the political implications within the eurozone may prove to be significant.
Greece’s left-leaning Syriza party has taken an “aggressive” approach to EU leadership and its negotiations with various European authorities, CFSGAM said.
“If this approach were to yield a more favourable outcome for Greece than that achieved by other governments that were also in very bad debt situations, ie Ireland, Portugal or Spain, then this could be seen as a potentially attractive political strategy,” the report stated.
The report also pointed to the fragility of the Spanish political system and its susceptibility to the left-leaning Podemos party.
CFSGAM noted that recent Spanish opinion polls showed Podemos sitting at just over 30 per cent. This is a 10 per cent jump from 2014.
“Any ‘success’ by Greece between now and the Spanish election later in year could embolden the more radical elements of the Spanish political spectrum,” the report said.
However, at present, Syriza has been blamed for Greece's financial situation – prior to the party's inception in January the Greek economy was growing at a rate of close to two per cent.
The ongoing crisis has also impacted political developments in the UK, with Prime Minister David Cameron committed to holding a referendum on Britain’s membership to the EU by 2017.
“Opinion polls show a small lead for the UK to remain within the EU, but any further political dysfunction or dilution of support for the EU within Europe itself could be significant for the UK vote," the report said.
CFSGAM concluded that the EU, as it stands, is not effective.
“Indeed, the Greek saga is likely to create momentum for further integration – especially fiscally and politically,” the report stated.
“The tortured nature of the negotiations with Greece is likely to convince even the most positive observer on Europe that the current structure of the EU is not optimal.”
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