Greek Election Won't Lift Uncertainty

Greek voters are off to the polls this weekend for the second time in as many months to choose a new parliament after May's inconclusive results. The lack of a functioning government in Greece has managed to ratchet up the uncertainty about the economic future of the country, and the results of the second round are unlikely to add much more clarity. The truth of the matter is that the situation in Greece, and the entire eurozone debt crisis, remains quite fluid, and trying to handicap what is going to happen with 100% certainty is virtually impossible. Investors need to be prepared for an unusually large range of outcomes.

The Greek political system doesn't lend itself to the relatively easy horse-race analysis of say a U.S. presidential election. In the U.S., you have two well-established parties with clear bases of support, a seemingly endless campaign, and enough polling to give you a fairly clear idea of a candidate's chances of winning. Once the election is over, the winner is clear (the elections of 1824 and 2000 notwithstanding), and they can start taking over the reins of power beginning in January the following year.

In Greece, there will be a huge number of parties competing for seats, and many of those parties are brand new. After years of a deep recession and economic turmoil, voters are unsurprisingly willing to explore new parties, and preferences seem to be changing very rapidly. Opinion polling is all over the map, and Greek law prohibits publishing new polls within two weeks of the vote, so the range of outcomes of the final tally seems to be very large. One party could end up dominating and taking an outright majority of seats, or votes could be more evenly spread across a large number of parties. Given the splintered results in May, the latter seems more likely than the former.

Assuming no one ends up with that majority, whoever ends up in the pole position on Sunday will then have to quickly move to form a coalition. This is easier said than done. There is a huge range of ideological positions and big personalities to deal with in the country. Just like in May, there is a very real chance that despite valiant efforts, no deal can be reached. This could lead to the installation of a technocratic, caretaker government or potentially even a fresh set of elections.

Nothing's Set in Stone
But even if one of the two most likely coalition leaders (New Democracy on the right and Syriza on the left) came out on top and were able to form a workable coalition, investors still wouldn't have a clear understanding of what is going to happen next in the Greek saga. At first blush, it would look like a Syriza victory would lead to a repudiation of agreements with the European Central Bank and the European Union, and a swift exit from the euro. On the other hand, a New Democracy victory would respect current agreements, even if there is an attempt to renegotiate some provisions. 

Unfortunately, reality is not that clear-cut. Politics is a messy business, and who knows what kind of agreements parties will have to make so that coalition will work. Leaders might be forced to back away from their campaign promises or take on more extreme positions in an effort to attract smaller parties to the fold.

The fact that we don't know how other European stakeholders will react to any new Greek government adds to the overall level of murkiness. Is Germany ready to accept more lenient terms on a Greek debt deal? How much political latitude does German chancellor Angela Merkel have? Is the European Central Bank going to keep its hard-line stance? On one hand, Europe has a strong incentive to keep Greece in the eurozone. An exit could quickly accelerate the crisis in other weak economies and further endanger the European economy. This dynamic could lead to a more flexible stance. On the other hand, the political reality in Germany and elsewhere makes it very difficult to be more lenient even if leaders wanted to be.

Long story short, even after the election results are released, we still won't have a clear idea whether Greece will be able to stay in the eurozone. If anything, the election will likely create more questions than answers. Add in all of the potential second-order effects on Spain, Italy, and other nations, and the number of plausible outcomes is mind-boggling. The range of possibilities spans from Greece suddenly exiting the eurozone and the entire common currency potentially dissolving, to Europe just muddling further through the current situation. 

Keep Your Plan in Check
So how can investors prepare for this level of uncertainty? To paraphrase Morningstar director of personal finance Christine Benz, you have to control what you can and try not to worry too much about what you can't. Trying to predict precisely what is going to happen and determine what investments will benefit from that event is extraordinarily difficult. 

What you can do is make sure that your asset allocation makes sense for your goals, that you are saving enough money, and that you are in solid investments that will be able to ride out a very volatile storm. This might not be the most exciting plan in the world, but given the huge range of outcomes in Europe, it appears to be the most prudent.