Welcome to the age of political contagion in Europe. We’ve had the sovereign debt crisis, we have seen Mr Draghi and his “whatever it takes” statement and his market calming actions thereafter, and now we see the potential for an endgame that some experts identified over a decade ago. It really could be that serious. The dislocation between an aloof political elite and the people they serve may meet its Waterloo this year as the Greek anti-austerity party Syriza pulled off a historic election victory. Mr Tsipras, the Syriza leader, will begin talks to form a coalition government with the backing of over 36% of the electorate, his party is expected to get 149 seats in the 300 seat parliament. No one should be under any illusion that their agenda will dominate Greek politics over the next few years. But what do they want? And why does it matter so much? Why indeed do we, at ParityFX, view this as having the potential for serious political contagion? Here are a number of key points to note:
- Greece has a public debt that amounts to 175% of GDP, which in money terms amounts to about €320bn
- Eurozone governments have already made commitments to further debt relief as long as the Greeks stick to a program of structural reform and austerity
- Syriza came to power on the back of promises to renegotiate and cut the debt pile by a third. They, correctly, argue that the debt burden is unsustainable
- Greece is required to pay over €3.5bn of principal in July, and another €3bn in August
- Eurozone governments directly (or via the European Financial Stability Facility) hold approximately two thirds of the Greek governments debt, the maturity on these loans have been extended out past 2040 and the interest rate on the debt radically cut to just 50bps over the euribor rate. Compare that to where Greek debt actually trades in the open market.. well over 10%
- Eurozone governments will argue, correctly, that Greece has already benefited from two rounds of relief that have substantially cut the debt burden
- Greece is not the only European country facing elections with an increasingly powerful anti-Eurozone party at the centre of the debate. Consider Podemos in Spain and UKIP in the UK.
- Greece will only be a part of the ECB’s quantitative easing programme if the government complies with the agreements that are already in place
This election outcome will reverberate across the European political landscape over the months of 2015 and the European political elites will be in quite a quandary. If they back off from their requirements of Greek austerity, what will they do if Podemos wins in Spain, or if the Portugese or Irish seek more relief as a consequence? Yet on the other hand consider these facts:
- The youth jobless rate in Greece has risen from 32.2% in 2010 to 57.5%
- The jobless rate amongst women in Greece has risen from 15.4% to 30.5%
- Public sector salaries have been slashed by almost a quarter since 2010
- The minimum wage has fallen by over 20%
- And the income of young workers has declined by over 30%
Is it any wonder that a party with radical ideas should win in Greece? It would be shocking if they didn’t!
It comes as no surprise that since the news started coming through late on Sunday EUR/USD has traded as low as 1.1097. We haven’t seen the euro trade that weak since 2003. I fear more records will be broken in the weeks to come. Equity markets, unsurprisingly, have not responded well to the election results, but there hasn’t been anything too dramatic yet. Markets are just a little bit down in the early European sessions.
I won’t spend anytime reporting on macro data this morning. I think the above narrative neatly encapsulates what will govern market volatility today. The rock of European governments trying to avoid opening a Pandora’s box of debt renegotiations versus the hard economic place the Greek electorate find themselves in, is plenty enough for all of us to digest on a Monday morning!
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