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A lot of investors are looking at Greece on Wednesday and seeing shadows of the financial crisis.
since the height of the eurozone crisis on Wednesday. The country's 10-year borrowing costs shot up by more than 80 basis points to 7.85 percent. News out of Greece helped pull down European
stocks across the board. So how bad is it? What follows are three important questions that investors will want answered:
Three reasons: The banks, Greece's extreme left and the end of the bailout program.
Greek banks are likely to be forced to raise more capital in light of the AQR—the Asset Quality Review, which is underway in Europe and whose results are due on Oct. 26. Banks make up
roughly 50 percent of the weighting of the Athens Stock Exchange, a much higher percentage than any other in Europe, so a decline in the banks leads to a disproportionate decline in the
index.
As for Greece's socialists, new polls—including one out on Tuesday—show they are leading other parties ahead of the country's next elections. If far-left leader Alexis Tsipras becomes prime
minister, he promises a showdown with the European Union over "the program"—austerity—that Greeks have been living with since 2010, in exchange for a huge financial bailout.
Which brings us to reason three: the end of the bailout program.
The part of the Greek bailout program from the European Commission ends this year; the International Monetary Fund's portion of the program ends in a little more than a year. Greek Prime
Minister Antonis Samaras wants to exit the program early, ahead of a key election in February, so he can campaign on giving Greece its sovereignty back. His argument is that Greece can
borrow from the market rather than from the hated "troika"—the European Commission, IMF and European Central Bank. But borrowing from the market is much more expensive than borrowing from
the troika, 7 percent versus 1 percent. Greek yields are rising, suggesting bond investors don't like the idea of Greece losing the troika yoke.
Although Greece still has a lot of debt, most of it is deferred debt, and remaining interest payments are extremely low. Beyond that, most of the debt is owed to other governments, not to
banks, so this is no longer a case of Greece bringing down the entire European banking system—as was feared in 2009, 2010 and 2011. It could, however, lead to German taxpayers losing money
if Greece is allowed to extend maturities or pay even lower interest rates.
However, the bond market also may be pricing in the fear—once again—that Greece could leave the euro common currency zone.
Short answer: Yes. Longer, more nuanced answer: Possible, but not probable. Here's the logic:
There is a presidential election in Greece in February. Key question: Can current Prime Minister Antonis Samaras get the votes he needs—180—in order to get his presidential candidate
elected?
Read MoreGreece says it rejects bailout talk, expects growth
If Samaras fails, it could lead to snap elections, perhaps as early as June. If the election were held now, polls suggest leftist Alexis Tsipras would win. Tsipras says he wants Greece to
stay in the eurozone, but only under certain conditions: debt forgiveness and a reversal of some reforms designed to make Greece's economy more competitive.
But those conditions conflict with staying in the eurozone. Fears of a possible euro exit may also be pressuring the banks, because a euro exit would mean almost certain bankruptcy for Greek
banks.
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