A win for the pro-euro and pro-austerity parties at the Greek election has avoided a major near term tail risk event. However, significant risk remains as the Greek coalition government attempts to negotiate more favourable terms for the bailout package. In Spain, the proposed €100bn bank bailout is a positive, but the structure of the deal has left financial markets disappointed. Financial markets are now less willing to give the political leadership in Europe the benefit of the doubt, with market rallies post positive news becoming short lived. Attention will now turn to the EU Leaders summit on 28/29 June for more comprehensive policy announcements and signs of any concessions by Germany on the future of the Eurozone.
Volatility and uncertainty
Volatility and uncertainty continue to hit markets as Europe dominates the news. The Greek political process is adding significantly to market volatility, but the weekend Greek election outcome has avoided the worst case scenario.
However, significant risk remains as the Greek coalition government will now have to attempt to renegotiate the terms of the Troika agreement (EU authorities, ECB and IMF), as well as implement existing measures. The government will also have to confront an aggressive opposition in Syriza, who can now mount a more aggressive opposition program from within Parliament.
Rhetoric from other Eurozone leaders, particularly Germany, has focused on the need for Greece to remain committed to existing commitments.
Germany Foreign Minister Guido Westerwelle stated that “I am relieved at the outcome of the election, but the work is not yet done”. “The substance of the reforms is not negotiable. Whatever government is formed must stick to what has been agreed with Europe.”
He did add, however, that “we’re ready to talk about the time-frame, as we can’t ignore the lost weeks and we don’t want people to suffer because of that”. It’s likely, therefore, that some concessions to the timeframe will be given to Greece.
Developments in Spain
Elsewhere in Europe, the other major development has been in Spain, where government 10 year bond yields have moved through 7 per cent in recent days, despite the €100bn bailout commitment for Spanish banks. Markets are demanding that the joint reliance between the sovereign and the banking system be severed.
There is hope that this is beginning to be recognised in the political leadership, with part of the G20 communique stating, “Euro Area members of the G20 will take all necessary policy measures to safeguard the integrity and stability of the area, improve the functioning of financial markets and break the feedback loop between sovereigns and banks”.