In truth, though, the outcome of the election had been largely priced into both commodity prices and foreign exchange rates, so although the euro weakened on the news it has not crashed. Switzerland’s removal of the Franc’s peg to the euro had more impact and the European Central Bank’s annnouncement of a quantitative easing program was equally disruptive. But Syriza’s election and formation of the government with the help of the far-right Independent Greeks party will certainly start a period of considerable volatility in European markets as negotiations are conducted in the glare of publicity, and no doubt behind closed doors, about Greece’s future in the European single currency.
The new Greek government has started positioning itself ahead of negotiations with Greece’s creditors and some would argue they have nothing to lose. There are many voices urging Greece to simply default on everything, leave the Euro and launch a new devalued Drachma but that is clearly the nuclear option and will be held as an unspoken threat during negotiations.
The reality is, there is very little chance that Greece can repay all its debt and build growth into the economy in any sensible time frame so something has to give, or so Syriza’s argument will go. Germany, in particular, and several other northern states, the Netherlands and Finland in support, will hold — at least in public — to the position that no renegotiation of debts or austerity policies can be allowed. In private, some flexibility and typical eurozone fudging will take place, but whether it will be enough remains to be seen.
Greece had on one level been doing well lately. According to the FT, Greece’s budget deficit has just about been eliminated, while the primary balance, that is excluding interest payments, is predicted by the IMF on various measures to be between 3 and 5% of GDP in 2015. Greece also has an external surplus of about 1% of GDP, compared with a deficit of over 14% in 2008-09.
But total debt at €317 billion, has now reached 175% of gross domestic product. Roughly 80% of debt is owed to the troika of the European Commission, the European Central Bank and the International Monetary Fund. Although earlier restructuring has lengthened the average debt maturity to more than 16 years, at a reasonable interest rate of 2.4% the burden of repayment is still keeping Greece in a deeply deflationary environment.
Across the age groups unemployment is about 25% and more young Greeks are out of work. That is socially destructive and, in the longer-term, a disastrous state of affairs for the generation that will be Greece’s future. Against this backdrop Syriza may be expected to go all out for the commitments they made on the campaign trail and, indeed, that is what the Greek markets at least fear. Bank shares have collapsed, dropping 40% since the results of the election on Monday.
Part Two of this post deals with Europe and Greece’s way forward and what that might mean for markets, banks and commodities.