WE SHOULDN’T be surprised that the initial euphoria in the financial markets after the Greek election results lasted for such a short time.
The election of the New Democracy party as the largest party boosted the markets because of the party’s pro-bailout, pro-austerity stance. The hope was that the election result meant that the new government would not follow the path of Syriza, the radical leftist party headed by the charismatic Alexis Tspiras, in repudiating the austerity programme and the interest payments on the high level of sovereign debt. A sovereign default, followed by probable Greek exit from the euro, contagion to the rest of the eurozone and a major European, not to say global, recession/depression would be avoided.
Hence, the markets initially made a move into risk assets such as equities, commodities and the euro. Such asset values tend to move positively with the expectation of growth in the economy. But the rally faltered – because traders recognized that the Greek election result changes little in Greece.
Moreover, other eurozone countries such as Spain may be heading for a default on their sovereign debt irrespective of what happens in Greece. Spanish ten-year bond yields rose by mid-Monday afternoon to 7.18 per cent, a record high since Spain joined the euro. Italian ten-year bonds also began to rise again to 6.09 per cent, for much the same fears as Spain. On the wider economic front, the rising concern about weakening growth in the US and China reduces the attractiveness of risk assets.
But the key factor is that the election result offers almost no change to the political and economic fundamentals affecting Greece.
If the New Democracy party heads up a coalition government that persists with the current policy stance of exceptional austerity then the either the government or the policy will not be sustainable.
As austerity intensifies with increasing unemployment, rising public protests and little or no improvement in the deficit and debt position, there will be the risk of break-up of the coalition and new elections in the near future.
Alternatively, even if the new government does manage to survive, the failure of the fiscal position to improve as output falls and unemployment continues to rise, means that the risk of Greek default and exit from the euro in the near future remains high.
For these reasons, the markets stifled their euphoria and went back to business as usual.
• Brian Ashcroft is Emeritus Professor at Fraser of Allander Institute, University of Strathclyde