The outcome of Greece’s election suggests a prolonged period of heightened tensions and difficult negotiations with the troika. Compromises are possible, but reform efforts could fall by the wayside.
Last week the ongoing drama of Greek politics and that nation’s place in the Eurozone entered the next act. The far-left Syriza party won a decisive victory in the early election, coming in just shy of an outright majority in the Greek parliament. While the size of the victory and Syriza’s choice of coalition partner caused some angst—Greek bond yields jumped around 60 basis points immediately after results were announced—the damage to financial markets was limited. No other European markets experienced a sell-off. This rather muted reaction is in part due to the European Central Bank’s (or ECB’s) new €1-trillion-plus asset purchase program serving as a sort of backstop for contagion risks.
Market Realist – The stage is set for the next act in the Greek political drama. With the anti-austerity Syriza firmly at the helm of affairs, it sure is going to be a turbulent ride for the Eurozone (EZU). In an election set to take the Eurozone by storm, Syriza emerged the clear winner with 149 seats to its credit, as the graph above shows. The party has formed a coalition with Independent Greeks with whom it shares only the anti-austerity ideology, a clear signal to the troika of its intentions to scrap austerity measures.
Market Realist – The party didn’t indicate any softening of stance after the swearing in. Greek Prime Minister, Alexis Tsipras, won a confidence vote on cancellation of the bailout program with the backing of 162 out of the 300 lawmakers on February 10, 2015. “We are not negotiating the bailout; it was canceled by its own failure,” Tsipras said in his speech to the parliament. Needless to say, this caused anxious investors to flee Greek markets (GREK), fearing the country’s exit from the Eurozone. The last few weeks proved to be a bloodbath for Greek markets, as stocks tumbled and yields on bonds rose.
The banking sector was hit especially hard, not only on the equities front, but also by large scale withdrawals. According to data from the Bank of Greece, bank deposits fell to a two-year low of 173.2 billion euros in December as Greek depositors withdrew 4.6 billion euros ($5.2 billion) due to the tense and volatile political climate. This can be seen in the graph above. According to Reuters, withdrawals amounting to 9 billion euros left the system in January. Most banks requested and received preliminary permission for Emergency Liquidity Assistance (or ELA) from the ECB.
The investor angst in reaction to the Greek election results was contained to Greek markets though, and it did not spread to the Eurozone (VGK). Italian (EWI) and Spanish (EWP) bond yields were however affected. European markets (FEZ) continued to surge on announcement of the ECB’s quantitative easing program.
Read on to the next part of the series to understand more about Greece’s debt negotiations with the troika.