Grexit fears return, but eurozone problem is more than about Greece

TWO big issues have been roiling financial markets in recent days. One is oil prices, which briefly breached the US$50 per barrel mark on Monday for West Texas Intermediate (WTI) crude - a 50 per cent fall from six months ago. The other is the eurozone, where market jitters have returned in anticipation of the general election in Greece on Jan 25.

Oil will likely continue to be a source of turmoil for some time yet. But Greece could be approaching a watershed moment. What appears to be scaring investors is the possibility that the far left party Syriza led by the 40-year-old maverick politician Alexis Tsipras might just win the election - as most opinion polls suggest - or at least form a major part of a coalition. Given Syriza's radical platform, the Greek economy could then enter uncharted territory and take the eurozone along with it. What a Syriza-led Greek government will actually do if in office is unclear - its leaders have made various contradictory statements. But on a couple of key points, there is clarity. It is anti-austerity - an understandable position given that Greece has endured more than six years of negative growth and has a youth unemployment rate of over 50 per cent. It has also called for a moratorium on debt payments. Greece's external debt is close to 250 billion euros (S$397 billion).

Both of these ideas are unacceptable to the eurozone's ruling establishment and in particular, to its largest creditor, Germany. While Syriza seems keen to remain in the eurozone - although it has occasionally suggested otherwise - there are reports that the German leadership is bracing for a Greek exit in the event of Syriza coming to power and believes that this will be manageable. Many economists suggest the reverse. Keen eurozone-watcher Barry Eichengreen of the University of California at Berkeley has pointed out that a Grexit would be a catastrophe, not only for Greece but also for the eurozone and financial markets generally because of, among other reasons, the likelihood that investors will start speculating about who will be next.