Markets optimistic as Greek cabinet coalesces

The left-wing anti austerity group, Syriza, took control of Greece and formed a coalition with the Independent Greeks Party, which would suggest a new hardline anti-bailout government is in the process of being formed. However, a few comments from the new finance minister and the leader of Syriza have managed to assuage market fears that a Greek exit (Grexit) won’t be on the cards.

It seems almost too easy, as the build-up to the election was rife with speculation about a Grexit if Alexis Tsipras took charge of the debt-laden nation of Greece. Furthermore, the forming of a coalition with the Independent Greeks, a right-wing party who also voiced anti-austerity speeches in their campaign, would suggest future austerity plans might meet opposition.

After the initial announcement, the euro briefly broke below the $1.11 handle and European shares also declined. However, despite this anti-debt mix, markets quickly shrugged off the initial foray south and erased losses based upon a few comments from the new finance minister of Greece, Yanis Varoufakis, who issued a statement saying that Grexit was “not on the cards”.

“We who are in the eurozone must not toy with loose or fast talk about Grexit or fragmentation. If that happens, disruptive forces would be unleashed,” said Mr Varoufakis.

Adding to the buoyant sentiment was a rather placatory victory speech from Alexis Tsipras, suggesting that  he won’t be upholding some of the more radical promises he made during the election campaign, which would likely have culminated in a Grexit.

In the run up to the election, Syriza’s leader made a huge number of promises that would see the nation break the constraints of the bailout programme. Some of the promised changes included large increases to pensions and the minimum wage, to rehire civil servants that were let go, to end the liberalisation of the labour market and to reduce the amount of money owed by Athens to other member states of the European Union (EU).

Although, now the election has been won, it seems that Syriza is indicating that they won’t ask for a reduction in their debt, but will propose linking its debt service to the speed of Greece’s economic growth. In effect, this would likely be an extension to the amount of time Athens has to repay its loans, which is acceptable to some of the other European countries.

It all comes down to compromise and will require a lot of work from both sides, as there are a number of upcoming repayments due from Greece, who simply does not have the funds to settle the debt. The Greek government will have to borrow more money by either selling more treasury bills to its banks or asking for further loans from member states of the EU, who are likely to ask the government to enact a number of reforms before lending more money to Greece.

It will all come down to finding the right middle ground. One that prevents a Greek default, allowing Greece to stay in the EU, and keeping the population happy with as little austerity measures as possible, allowing the new leader to renege on as little of his promises as possible. Otherwise we may see markets turn back lower as the threat of a Grexit once more rears its ugly head.