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Euro shrugs off Greek Syriza victory after recent falls

Jan 26, 2015 at 10:04 am in Market Commentary by contrarianuk

euro usd jan 26

Things didn’t look great for the euro earlier today with the currency trading against the dollar at a fresh 11 year low of 1.10976 yesterday on the news that the left wing Syriza party had won the Greek election over the weekend. But today the euro has bounced to trade at 1.125 despite fears that the 1.10 level would hold in the face of a potential Grexit, with Greece being forced out of the eurozone.

Alexis Tsipras, the leader of Syriza, has vowed to renegotiate the terms of the  €240bn bailout with the so called troika (European Union, European Central Bank, and International Monetary Fund) and told voters that he intends to reverse austerity cuts including measures like hiring more civil servants and raising the minimum wage. But Tsipras seems to have reassured the markets somewhat with his conciliatory tone saying that he wanted to negotiate and many believe that Syriza would not want to consider the dramatic financial implications of a euro exit especially with a €7 billion payment due as a part of the bailout shortly, “The new Greek government will be ready to co-operate and negotiate for the first time with our peers a just, mutually beneficial and viable solution”.

Greek voters have clearly had enough of austerity but what choices do they have. Syriza will struggle to convince Germany in particular to relax the terms of the loan repayment to allow the new government to manage a less severe austerity programme. If Greece does exit the euro, Greeks face huge uncertainty as access to financial markets disappears and the new Drachma would suffer huge volatility. The practical implications of switching bank notes, resetting prices in stores etc. would be dramatic.

Tsipras said last night that “today the Greek people wrote history”, “The Greece of the elite has been defeated” but fulfilling the party’s election promises may be difficult. The Bundesbank and other lenders will no doubt take a firm stance preferring to let Greece leave the euro rather than risk offering a precedent for other countries who have received support.

After the weakness in the eurozone required the ECB to intervene with a  €1 trillion plus quantiative easing programme, this is the last thing the languishing euro needs. The question is will it stir other voters in disgruntled member states to vote out austerity focused governments in an attempt to take on the lenders. No doubt there will be plenty of rhetoric over the next few weeks and who knows how this will end. The Swiss central bank must be mightily relieved that it does not have to hold the Swiss Franc against the euro any more.

Contrarian Investor UK

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