By Michael Hewson (Senior Market Analyst at CMC Markets UK)
The outcome of the Greece election could prove to be one of those results that could end up being potentially toxic to the winner, given that the next government could well preside over Greece’s eventual exit from the euro.
As things stand Syrizas leader Alex Tsipras has indicated that his party will not take part in any attempt to form a coalition government thus removing his party from any blame if a newly formed government subsequently splinters and fails.
It remains to be seen whether New Democracy’s Samaras will be able to form a government stable enough to implement the reforms demanded by EU leaders, however as the biggest party he will try, and given the stakes a dialogue with PASOK remains the likely option.
The challenges facing the Greek economy remain mountainous and the general feeling remains predominantly that the day of reckoning has merely been delayed.
Initial reactions from Europe appear to be favourable to the outcome with EU leaders softening their tone with respect to adjusting the bailout terms.
A statement from Eurogroup finance ministers indicated that international monitors would return to Greece shortly to discuss next steps for a way forward to the adjustment program, which is already off track.
German finance minister Schaeuble suggested that the result showed that Greeks are in favour of the deep economic and fiscal reforms, being undertaken, which is probably stretching the truth somewhat. It’s more likely Greek voters were terrified of the step into the unknown dropping out of the euro at this time might bring and decided to go with the status quo, for now.
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In any case with Syrizas once again growing its share of the vote, reflecting the growing opposition to the bailout terms, it is unlikely that any new government will find implementing the bailout measures any easier than previous governments. It would appear that the proverbial can has once again been kicked a little bit further, which at least will makes today’s G20 meeting a little less anxious than it might have been.
Separately in Frenchelections new President Francois Hollande’s socialists look set to win a majority and in the process strengthen his hand in the passing of new legislation that would take France’s foot off the fiscal brakes. This is likely to put him on a collision course with Germany and German Chancellor Angela Merkel who has become irritated at his calls for Germany to accept Eurobonds, while at the same time reducing the French retirement age, back to 60, and increasing the minimum wage.
The worry now is that if markets perceive that France is backing away from attempting to bring its budget deficit down, investors could lose confidence and push French borrowing costs up which in turn could put pressure on its remaining “triple A” credit ratings, and drive its borrowing costs up, thus putting a much greater burden on Germany.