John J Hardy
In this latest webinar, Saxo Bank's head of FX strategy John Hardy analyses the market after the central bank of Turkey announced a huge rate hike.
Article / 26 January 2015 at 0:08 GMT

Greek election: It's really up to the ECB and EU now

Chief Economist & CIO / Saxo Bank
  • Greece in reality has little choice: Comply with the Troika or leave the EUR
  • Syriza's win is a disaster but at the end of day, Greece did what we expected it to do
  • Greece needs to pay EUR 22.3 billion in principal and interest on various loans 

By Steen Jakobsen

The result was worse than expected whatever the final outcome - the anti-austerity vote is massive, but it could be an empty gesture as Greece in reality has little choice: Comply with the Troika or leave the EUR. I doubt the later will happen with the same vote as the Greeks are tired of austerity but not off being European.

EUR/USD is down 55 ticks as I write, at 1.1145. I expect Greek stock market will be down 5% tomorrow and that Europe overall could be down 2% unless Germany, the ECB and EU comes out supporting a move towards some compromise (which is unlikely this week)

Game theory dictates that some solution will be found which is sub-optimal for all parties, but the risk it will take longer than market have nerves for.

Syriza did better than expected - making negative reaction more likely

Syriza did better than even the polls suggested - the gap to ND is 10% as I write this, and for the market this is a close call as Syriza may get a mandate to rule alone. (Greek election: Syriza Party set to take power - Source Sky)

It's a disaster for "austerity" and common sense, but at the end of day, Greece did what we expected them to do: Desperation forced the voters into the arms of a left-wing government who's rhetoric reminds me of my youth (many decades ago) in the the 1970s: Comrades, capitalism, imperialism is some of the words I heard on TV interview this evening. It makes makes one smile: "What goes around, comes around".

 Syriza's gaining power is a disaster for austerity and common sense. Photo: Thinkstock

The answer to the market reaction lies in a very different place: most of debt has changed hands since this crisis started from local European banks to EU and ECB through mainly the European Financial Stability Facility, Greece needs to pay EUR 22.3 billion in principal and interest on various loans - a tidy sum as it equals pretty much what what the government pays its state employees (Source: New York times, Nomura and IMF)

The creditors are even interesting: Greece is scheduled to pay the ECB EUR8 bn, with EUR7.6 bn of that coming due in July/August (Let us assume there is some kind of deal no later than June due to this fact!)

Who owns Greek debt?

The (rough) break down of creditors should a Grexit happen is like this: (Source: MacroPolis)

ESM: EUR145 bn in loans. The ESM is by far the largest creditor of Greece. We have "socialised" the risk from bank balance sheets to the tax payers of Europe. It's also the most favorable (to Greece) in terms.

IMF: EUR20.1 bn

ECB:  It has more than EUR55 bn accumulated under the SMP program. 

The market will be waiting for the creditors to comment before it makes a big move

It's the German, EU and ECB reaction to tonight result which will rule the market. Greece lost its independence during the peak of the crisis. A debt to GDP of 175% and rising makes anything they do without getting debt relief futile.

This link shows the pain: Greek debt clock 
Interest per year: EUR 30 bn. Interest per second, EUR972. Debt per citizen: EUR 38.755.

The political risk: Big?

The FT is already running a headline which reads: "Will Syriza's Tsipras turn out to be a Lula or a Chavez?" 

I don't know of course, but what I do know is this:

  • Europe has had first major sea change politically going the the extremes. I am sure many party leaders in election prone countries: Denmark, UK first and foremost have taken notice.
  • That markets hates uncertainty and binary events driven by irrational politicians
  • Greece needs to find a lot of money or a compromise before end of June, otherwise ECB is losing face and that can not happen!
The bigger risk is that although the market did what we expected politically tonight, the market is lagging behind in its assessment of the risk. Consensus still says: There will be compromise and the "usual" deal, but facts are different: The debt is now owned by governments and tax payers.

Its so much easier to take decisions on other people money, but this time, there are no new pockets to move the "obligation" to:

Greece said enough is enough, EU/ESM and IM said: enough is not enough and market probably will say enough already.

SNB ran out of time to react week before last, ECB ran out of promises and reacted last week, this week Greece ran out of time (and patience) - next? The ECB/ESM and EU needs to take decision: Something politicians and systems overall rarely does well.

Safe travels.

-- Edited by Adam Courtenay

Steen Jakobsen is chief economist and chief investment officer at Saxo Bank, the home of social trading

Steen Jakobsen Steen Jakobsen
Early move on Greek election: Stock market down 5%+ and rates 40-70 bps higher
Steen Jakobsen Steen Jakobsen
It seems my message gets misinterpreted so here is what I am trying to say: What Greece needs is a hair-cut - not more or less austerity.....the political system had a wake-up call and it needs to be accountable to the lack of solutions AND lack of growth in Greece and Europe. The wheels are in motion to support broader europe growth(Weaker EURO, lower funding rates and significant lower energy prices) - I believe in micto not macro.
Steen Jakobsen Steen Jakobsen
should read micro not micto


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