A key question on trader’s minds is who will win the June 17th Greece election and whether it results in a Greek exit of the eurozone.
Deutsche Bank gives it assessment in a report called Probability weighting EUR views on Greece
Under a variety of assumptions, the market pricing looks consistent with: a) significant odds in favour of Greece remaining part of the EUR zone and EUR/USD trading between 1.25 and 1.30; and, b) a worst case Greek exit global contagion scenario taking EUR/USD to 1.10, but not to levels as low as parity.
After the Greek elections, there are 6 main scenarios that are worth considering:
- A EUR friendly coalition probably led by New Democracy (ND) that does enough to keep Greece in the EUR.
- A EUR friendly coalition probably led by ND that still leads to a Greek exit, but not a major global contagion event.
- A EUR friendly coalition probably led by ND that still leads to a Greek exit (probably with a delay) because Greece fails to comply with the Troika program and this ends up in a major global contagion event
- An anti-austerity led government, probably led by Syriza, that nonetheless compromises sufficiently, that Greece remains in the EUR at least through 2012.
- An anti-austerity led government, that ends with Greece leaving the EUR but where contagion is relatively well contained.
- An anti-austerity led government, that ends with Greece leaving the EUR which becomes a major global contagion event.
Deutsche Bank Probability Chart
Odds Not 50-50
Deutsche Bank thinks the probability that New Democracy or Syriza wins is equal, 50% each.
I think the odds Syriza wins is about a 2-1 favourite as explained in Greek Polling Ban In Effect Until Election; Latest Results Show SYRIZA Support at 31.5 per cent, Well in the Lead Over New Democracy; Why I expect Syriza to Win
Note that Deutsche Bank thinks that even if Syriza does win, Greece is as likely to remain in the eurozone as not. That strikes me as being far too optimistic. Even if Syriza stays in for a while, it will eventually run out of money.
Finally, please note that the Deutsche Bank contagion scenarios total a mere 28%.
What does “contagion” even mean? As I have explained before, Spain has problems of its own making not related to Greece at all.
Spain is not going to exit the eurozone solely or even significantly because of Greece.
The true contagion scenario is not what people think but rather the reverse. Greece exits the eurozone, recovers, and other countries decide to do the same.
In the context of the Deutsche Bank article, I fully expect Spain to exit the eurozone. Is that contagion? It depends on why and how you define the word.
Finally, even if New Democracy wins, the odds of a Greek exit do not drop to a mere 5% as the above table shows. I would say they are still 50% minimum and depending on your timeframe as high as 85%.
Mike “Mish” Shedlock
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