A radical party is about to take power in Athens. A showdown over its debts is looming. Berlin is rattling its sabres, hinting that if the Greeks aren't happy they can go take a leap in the Aegean, while the Greeks seem to have decided that they have had enough of austerity.
If the Greeks revolt, the Spanish may be next, then the Italians. Come spring, Europe could be plunged back into a full-blown currency crisis.
So it's little wonder markets feel jittery ahead of the Greek election late this month. Yet investors will almost certainly be fine. Why? Because if the anti-austerity Syriza party does take power, the rest of the eurozone will back down, and allow Greece to re-schedule its debts.
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And if the established parties cling on, a 'Grexit' is off the agenda. Either way, the markets will come out ahead.
The Greeks want change
It's hardly surprising that the Greeks want change. After five years of grinding austerity, a 25% contraction in GDP, and with an unemployment rate of more than 25%, they've had enough.
Opposition party Syriza, led by the charismatic Alexis Tsipras, has consistently been three to six points ahead in the opinion polls. Unless something changes radically between now and polling day, Syriza looks set to comfortably beat the ruling New Democracy party.
Syriza's platform of renegotiating Greece's debt, and raising public spending again regardless of the conditions imposed by the European Union (EU) and the International Monetary Fund has rattled stockmarkets.
On the day elections were called in December, stocks in Athens plunged by 11%, and the yield on Greek debt surged back up. You can see why. Germany has hinted strongly that the Greeks cannot expect any more help, and that if they are fed up with austerity, they are welcome to leave the euro. The fear is a Syriza victory will trigger a wider eurozone crisis.
But that won't happen. Here's why. A Syriza victory is certainly the most likely outcome. Wacky as some of its policies may be, it is hard to grasp why Greeks would stick with a political establishment that has given them the worst depression seen in any country since the Thirties.
But once Tsipras is safely in power in Athens, either on his own, or in coalition, a deal will be struck.
but there'll be no Grexit
Right now, the Germans and other EU leaders insist there can be no more bailouts for the Greeks. They are briefing the papers that the eurozone has enough firewalls in place to survive a Grexit. If they want to leave, that is up to them. They can't expect extra help.
But they're bluffing. In the run up to the election, they are bound to say that. Anything else will only encourage Greeks to vote for Syriza. On the day after the election, however, it will be a different story.
Greece has total debts of about €300bn. The eurozone economy has a combined GDP of around €10trn. When he comes to the negotiating table, Tsipras will probably compromise.
He won't expect to get everything he is asking for. A deal to write-off a third of Greece's debt say €100bn could probably be negotiated. Would the Germans really risk the chaos that might engulf the eurozone after a Grexit for the sake of €100bn 1% of GDP?
Bear in mind the bulk of Greek debt is guaranteed by the European Financial Stability Facility (EFSF). So if it does not forgive some of the debt, the whole lot might be repudiated unilaterally by the Greeks. If that happens, the loss will end up with the European governments that backed the EFSF.
Also keep in mind that Germany's chancellor, Angela Merkel, won re-election last year, so doesn't have to worry too much about whether another bailout is unpopular with her voters. In those circumstances, she will cut a deal. It would be crazy not to.
A referendum on the euro
On the other hand, if the established parties scrape home probably in a coalition fears of a Grexit will subside. If the Greeks don't vote against austerity now, they probably never will, and the issue of the country leaving the euro will be off the agenda for a generation.
Better yet, there will probably be some concessions in the coming weeks to try to keep the Greeks on board just as in the final days of the Scottish referendum. Alongside the threats, expect some press briefings about how the Greeks can ease up on spending cuts and tax rises as long as Syriza doesn't come to power.
Either way, austerity will be relaxed to some extent. After a 25% drop in output, the Greek economy seems to have finally bottomed, and can probably now recover. If the government, already in a primary surplus (tax revenues cover spending, excluding interest payments on debt), can boost spending a little, the economy may finally achieve decent growth.
Greek stocks were already some of the cheapest in the world, with the Athens index down by more than 80% since the crisis started. There will be plenty of predictions of disaster ahead of the elections. Ignore them. Greek stocks, and the wider eurozone markets, will come out of this ahead regardless of who wins the election.
