Tsipras Victory Would Put Greece On Collision Path With Europe

Tsipras Victory Would Put Greece On Collision Path With Europe

Sayan Guha.

Good morning and welcome to today’s foreign exchange market commentary on Tuesday, the 29th of May.

“The next month’s Greece election is unlikely to yield any result,” that’s what people with ears on the ground say. The battle for Athens is between Antonis Samaras of the centre-right New Democracy party and Alexis Tsipras of the radical left SYRIZA party. However, even if Samaras manages to emerge victorious, he will not have a parliamentary majority and will have to stitch up a coalition government.

Theoretically, Samaras can go ahead full-steam with reforms to ensure the economy is turned around in future. But the likely outcome will be he going soft on austerity measures, accelerating the decline. As his popularity sinks, his government would collapse in a few months.

On the other hand, if Tsipras wins, Greece will be on a collision path with the rest of Europe. He thinks the bailouts will continue without Athens undertaking any reforms as a possible Greece exit will be devastating for the region. But the grim reality is that other countries preparing contingency plans to minimize the blow. Germany is unlikely to give in to his strong-arm tactics.

However, it’s possible that Tsipras will blink first. But the communists won’t allow him to make a somersault, lest they lose credibility. The country is on a life-support system; while the ECB authorises money transfer the Greek banks, while the IMF gives bailout money. If the European Central Bank turns the first tap off, the banks will run dry within days. If IMF withholds cash transfer, salaries and pensions will stop from July.

Paradoxically, this may also ensure that Greece continues to stay in the Eurozone. Under the above mentioned conditions, it is likely Tsipras’ government would collapse and Greece would require a third election. People will be forced to decide whether they wish to continue in the euro, provided rest of the EU members present a Marshal Plan to help the country. The Greek mandate is fractured now, about 75 percent wish to stay in the euro, but nearly two-thirds don’t want austerity. To begin with, a comprehensive plan that includes taking over Greece banks and guaranteeing deposits is required.

A third election might spring up a national unity government. It’s a possibility fraught with dangers, but also Athens’ best chance to avoid the drachma.

CURRENCY RATES OVERVIEW

GBP/EURO – 1.2496
GBP/US$ – 1.5679
GBP/CHF – 1.5023
GBP/CAN$ – 1.6032
GBP/AUS$ – 1.5881
GBP/ZAR – 13.0461
GBP/JPY – 124.67
GBP/HKD – 12.1714
GBP/NZD – 2.0552
GBP/SEK –  11.2231

EUR: The single currency showed some strength yesterday due to a corrective short-covering and the EUR/USD pair hit 1.2620. However, the rally was short-lived and the single currency slipped as investors factored in the news of deteriorating conditions of Spain’s autonomous regions and its banks. The situation was further exacerbated as reports suggested that Bankia’s bailout cost may touch €23.5 billion versus the previous forecast of €19 billion. The Spanish 10-year borrowing costs soared to 6.5 percent while yield on German 10-year bunds dropped to 1.37 percent, widening the spread to more the 5 percent for the first time. The cable continued to rise on the back of strong demand for safe haven currencies and closed at 1.2440 on Monday.  In the absence of any market moving economic news from the region today, the euro is likely to experience downward bias today. The GBP/EUR pair opens at 1.2503.

USD: As US markets remained closed yesterday in observance of Memorial Day, the greenback showed limited movement though demand remained strong as concern over Spanish banks’ solvency and a possible Greece exit following next month’s elections continued to spook markets. The GBP/USD remained range-bound in the absence of any worthwhile economic news from the UK. We have US consumer confidence data today though this is unlikely to provide much relief from the European developments. The unabated flight to the safe-haven dollar is likely to continue, making life difficult for the cable. GBP/USD opens at 1.5712 this morning.

 

 

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