* Anti-bailout Greek vote the focus for markets
* Peripheral euro zone bonds to be pressured
* Stocks may be less vulnerable
* Chink of light if EU shifts to growth measures
By Mike Peacock
ATHENS, May 6 (Reuters) - Investors are likely to react with alarm to the electoral drubbing handed to Greece’s main parties but analysts said there could be a silver lining if Europe is forced to think more seriously about fostering growth.
Greece’s PASOK and New Democracy parties - supporters of the country’s bailout programme - looked set to capture well below 40 percent of the vote between them on Sunday, making it tough to form a stable government and throwing the country’s future in the euro zone into doubt.
France also elected a new president on Sunday, Francois Hollande, a Socialist who has pressed for an end to German-led austerity policies, a sign that Europe’s electorates are speaking with one voice.
It is the Greek vote which will dominate financial market attention as investors gauge whether the twice bailed-out country could renege on its debt-cutting terms and throw the whole currency bloc back into turmoil.
The government bond market is likely to feel the impact most keenly with a risk that pressure on other vulnerable euro zone states will increase, sending their borrowing costs higher.
“If the situation stays like this and the exit polls are proved correct, markets will react aggressively,” said Achilleas Georgopoulos, rate strategist at Lloyds TSB in London.
He predicted that bonds from peripheral euro zone countries such as Spain would underperform.
Spanish bonds have moved to the forefront of the crisis in recent weeks, with yields rising to around 6 percent, not far from the 7 percent level that is seen as unsustainable.
“The risk is that foreign investors turn very cautious again over the euro zone, and they might decide to simply get out and wait to see how things develop,” said Philippe Waechter, head of economic research at Natixis Asset Management in Paris.
Stock markets, which have headed south since a bumper first quarter, may feel less of an impact.
“People across Europe are fed up with tough austerity measures imposed by German policymakers, and this could be a turning point,” said Riccardo Designori, financial analyst at Brown Editore in Milan.
“The impact on European stocks could be limited, however, as the market has been steeply falling for six weeks, so a lot has been priced in already.”
Hollande has put himself at the vanguard of a political groundswell in Europe, arguing that focusing slavishly on cutting debt is self-defeating and a strategy for growth is needed. But his room for manoeuvre is limited.
Germany and the European Central Bank - while espousing a growth plan - insist it must not dilute austerity drives and the bond market is likely to react savagely to any significant policy loosening in high-debt countries, as it did with Spain when it raised its 2012 budget deficit target.
“Hollande’s victory has already been priced in by markets, however his promises made during the campaign have not been priced in, so there is risk on the downside if he stands his ground,” said Christian Jimenez, fund manager and president of Diamant Bleu Gestion in Paris.
“There’s a clear need to boost economic growth across Europe, no question, but the debate is on how to achieve that without spooking investors. All in all, Hollande won’t be able to convince (German Chancellor Angela) Merkel to soften her position on the need for austerity.”
Berlin, the EU’s paymaster, is opposed to stimulus measures that rely on more government money. But with an EU summit at the end of June due to come up with a growth strategy, the wave of anti-austerity votes could just provoke something of a rethink.
“This might be a turning point for the region that could change Germany’s fiscal orthodoxy,” said David Thebault, head of quantitative sales trading at Global Equities in Paris.
Markets may react favourably to a growth strategy which keeps national debts on a downward path. But with the euro zone returning to recession, that is tricky to pull off.
A “troika” of EU, IMF and ECB inspectors will visit Athens quarterly to assess progress in meeting its bailout terms. A new Greek government will quickly have to come up with an additional 11 billion euros of spending cuts to keep on track and continue to get cash essential for its survival.
“We expect that, if the requested actions are not carried out, the Troika would, in a first round, delay and probably, in a second round, cancel further bailout payments,” analysts at Citi said in a note. “We continue to expect that the probability of a Greek exit is 50 percent.”
The question for markets is whether that would still have the power to pull the euro zone into a wider existential crisis given the firewalls now in place, the fact Greek creditors have written down most of their holdings and massive injections of ECB money into the financial system.
“In the worst-case scenario, we’ll get a completely fragmented parliament without the ability to legislate anything meaningful and Greece could then be slipping towards an exit from the euro zone, which would be a minor event for Europe, but a disaster for Greece,” said Erik Nielsen, Global Chief Economist at Unicredit.
Others were less sanguine.
“We’ve already had a default in Greece and the market is priced for another default,” said Justin Knight, rate strategist at UBS in London.
“The real risk is if markets start pricing in the possibility of Greece exiting the euro. That’s in extremis but if that starts to happen you might start to see no buying of Spanish and Italian bonds and deposit flight not only from Greek banks, but also from banks in other peripheral countries.” (Reporting by Toni Vorobyova, Emelia Sithole-Matarise, Blaise Robinson, Ingrid Melander; Editing by Anna Willard)