News of young opposition leader Alexis Tsipras win in last Sunday’s Greek elections has already started to rock the eurozone. His left-wing Syriza Party claimed an unequivocal victory, promising to restructure the harsh debt that the International Monetary Fund (IMF), European Central Bank (ECB) and European Union (EU) (or Troika) had imposed, raise wages and halt some spending cuts.
The election result was a revolt against austerity. New Finance Minister Yanis Varoufakis has called the austerity measures “fiscal waterboarding.” Political parties in France and Italy who were also opposing austerity have gained traction and the fear is that this sentiment could soon spread across Europe.
Complicating matters further, the all-left Syriza party is pro-Russia, and has condemned the EU’s sanctions against that country. Because the EU needs a unanimous vote by member nations to take additional sanctions, the new government seems to be using this as their bargaining chip to renegotiate the Troika’s debt terms.
The reaction in Brussels to this maneuver was cold, and so are the Germans, because they know that any debt forgiveness will only mean more for Germany to finance.
All of this comes on the heels of the ECB’s recently announced quantitative easing program that includes buying even more Greek debt. And now, since all euro zone nations will be holding Greek debt, any forgiveness must also be approved by each one of the member nations.
While the distance between Greece and the Troika has widened, the financial markets also have spoken. Greek stocks and bonds were sold off this week, and Greek banks are suffering outflows of deposits, quenching their liquidity. Greek government bond yields are back above 10%, and the probability of Greek debt to default within five years has increased to 70%. Finally, Standard& Poor’s said it may cut Greece’s credit rating, given the uncertainty. And the euro remains under pressure. All of this should serve as a warning for Prime Minister Tsipras to understand that the financial market does demand integrity to repay debt.
Our View: We think there will be some sort of middle ground agreement between Greece and the Troika, but only if the EU is seriously moving forward with fiscal consolidation. Debt forgiveness is a long shot, but extending the debt maturity and lowering the interest rate may be more likely. Either way, all of this still points to a more sluggish European economic recovery.
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