What Sunday’s Greek Election Means for Investors

This is the calm before the storm.

The euro has basically been in a holding pattern between $1.24 and $1.26 for the past two weeks. U.S. markets have essentially been flat in June. Gold prices are virtually unchanged since May.

To a certain degree, it’s all been waiting – bracing – for one crucial event: this Sunday’s Greek election. After last month’s parliamentary election failed to produce a combined majority among the top two finishing parties, anticipation has built for this month’s re-vote. So has the angst.

Global fear is mounting that the upstart Syriza party – the radical leftist party that finished a surprising second in last month’s Greek election – could win and lead to a hasty Greek exit from the euro zone. Party leader Alexis Tsipras has threatened as much, saying that if elected he will reject the 240 billion-euro bailout issued jointly by the European Union and the International Monetary Fund, which if  accepted requires Greece to implement long-overdue austerity measures.

Rejecting the austerity package would amount to rejecting the European Union as a whole, and would likely precipitate Greece abandoning the 17-country euro zone altogether.

Almost unanimously, economists say that would be disastrous for both Greece and the global economy. If Greece leaves the euro and tries to go it alone – abandoning the euro for its own drachma – many feel it would create a domino effect that may eventually force other debt-ridden nations such as Spain, Italy and Portugal to do the same.  It would further devalue the euro, which has already fallen off 13% against the dollar in the last year.

While that would be good for U.S. investors in the short term – as European investors would no doubt flock to the dollar as a safe haven against a crumbling euro – the long-term ramifications for the global economy could be severe.

Here’s what Institute of International Finance Managing Director Charles Dallara told CNBC:

“I think it would put us back in a global recession. (The European Central Bank) would be immediately almost insolvent.”

In the U.S., economists estimate that uncertainty over the fate of Greece is “already shaving anywhere from one tenth to one half a percentage point from (our) 2012 gross domestic product growth,” according to Reuters.

Europe is the biggest trading partner for the U.S. and China. So a collapse of the euro would undoubtedly have a major ripple effect in the world’s two largest economies.

And if you think uncertainty ruled the U.S. financial markets last year, imagine what the collapse of the euro might do. Economic growth is already slow here in the U.S., and consumer confidence is hanging on by a very thin thread. Chaos in Europe would likely be enough to shatter that fragile confidence.

With interest rates near zero and our national deficit establishing new all-time highs by the minute, the possibility of a much-discussed double-dip recession would suddenly become very real. Some economists insist it would be worse than the subprime mortgage collapse of 2008.

But that, of course, is all theoretical. This is all a worst-case scenario that only goes into motion if the radical Syriza party prevails in Sunday’s Greek election. Right now the election is difficult to handicap – many prognosticators say it’s “too close to call.”

In the May 6 election – which produced no majority winner – Syriza finished second to the fiscally conservative New Democracy party, with 17% of the vote. Today support for Syriza has grown to almost 30%, according to polls.

Really, this Greek election is a battle of austerity vs. non-austerity. The New Democracy party, like most other Greek parties, is adamantly in favor of austerity measures, and would accept the terms of the recent EU-IMF bailout deal. The Syriza party would reject those terms, insisting that Greece can somehow pay off its mountain of debt – Greek banks alone carry a debt load that is 113% of the country’s GDP – on its own.

With Greece in its fifth year of recession and unemployment now close to 22%, a rejection of austerity would amount to the country signing its own death sentence. A vote for Syriza means a vote against the austerity that the rest of the world knows Greece so desperately needs.

Until Sunday, all the rest of the world can do is hold its breath and wait.