Gauging the reactions of the markets

By Alexis Papachelas

Talk of what the markets are up to is back in our lives and there are those who want people to believe that they have an infallible instinct when it comes to predicting how the markets will react at any given time.

There is no doubt that the people working the markets, such as fund representatives, have become intimately acquainted with how Greece works. Their people, in turn, have contacts throughout the government and main opposition SYRIZA and often even further than that. They know all about political developments in Greece, the internal strife in PASOK and the anti-European sentiment being propagated by the opposition.

It is impressive that not so long ago they would run as far away as possible from anything Greek and are now scrambling to be on the front line to buy Greek bonds.

Did something major happen or do the markets simply behave irrationally? What is certain is that in the past year-and-a-half market representatives have had close contacts with the prime minister and his staff, and have come to trust them. It’s important to hear that there is a plan to exit the crisis from the prime minister himself and to then see evidence of that plan being implemented.

A second factor that contributed to the shift in market sentiment is the confidence crisis concerning investments in Russia, Turkey and emerging markets. There is a lot of money floating around out there and Greece is starting to look like a safe place to park it and see high yields as well. The markets, after all, always display a herd mentality, with the majority falling in behind the braver minority and investing in a country or a business that had been previously seen as too risky.

A third important factor is the clear commitment of Greece’s European partners that they will help the country again if it needs it, creating a sense of security among investors.

Whether the markets turn out to be right or wrong in trusting Greece again will depend largely on how we handle matters from now on. If the country falls into governance vacuum or if the next government, whoever that may be, tries to bully the creditors into major concessions, the consequences could be devastating. That said, the markets have been wrong about Greece in the past, but their approach toward the country seems different this time around. They know it a lot better today and are very well aware of what could go wrong. They see that the economy has hit rock bottom and that Greece’s partners will not abandon it. In other words, they are confident that whatever goes wrong in Greece, there will be a safety net ready to catch it if it falls.