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Wednesday, 14 January 2015

Zero-In Greece: January 25 Elections

Greece finds itself in the spotlight again after a third presidential vote, which means a snap-election will be called January 25.

In short, the four year bailout loans expired in December 2014 and the creditors want to be paid back, despite the economy still being in a sorry state four years on from the crisis. That would mean more austerity and also political suicide for the leading New Democracy political party, which is pro financial markets. There is a lot of uncertainty in the air and based on the assumption that markets don't like uncertainty that would imply then that the Santa rally is likely to fade away into oblivion during the first three weeks of the year.

Leading up to the elections we can expect daily headlines on Greece coupled with ample volatility in the financial markets, in other words a great trading opportunity if you are on the right side of the market.

To help make volatility your friend there a few things you'll need to track ahead of the parliamentary elections scheduled for January 25.

There's one main political party that it would be wise for investors to keep on their radar. It is the Syriza party, which is anti-austerity and anti-bailout. If the charismatic leader Alexis Tsipras of the Syriza party were to be voted in, it would probably trigger massive capital outflows from Greece. Bond holders would bolt for the exit-door, yields would sky-rocket, making serving the national debt impossible and a sovereign debt default would probably ensue. Moreover, due to the interconnectivity of the Greek economy, a sovereign debt default would not be a lightweight matter.


Unfortunately, Greek debt has not been ring-fenced from the western banking system. A Greek sovereign debt default is likely to have more of an adverse impact on the western financial system than, say, the Argentine debt default last year, which was a relative non-event for the financial markets this time around. A sovereign debt default in the peripherals, like Greece, could be the final straw that breaks the camel’s back. The last 2008 financial crisis had its origins in the sub-prime mortgage meltdown in the US, which represented a relatively small segment of the US mortgage market. But what would happen if Greece defaulted on its sovereign debt? It would create a liquidity crisis in the shadow banking system even worse than that experienced in the last 2008 financial crisis. Therefore, so much is at stake on this Greek election.

If the latest opinion poll is anything to go by then the whole show is going to be a real cliff hanger for investors. Apparently, Syriza is leading in the opinion polls and Tsipras is projecting the confidence of a leader in waiting.

“Be optimistic and cheerful,” he reportedly proclaimed after the presidential vote on Monday. “Austerity will soon be over. The Samaras government, which looted society and decided to take further austerity measures, is finished.”

Syriza Party has been campaigning for years against the harsh austerity measures imposed on Greece in exchange for the international rescue program. Tsipras wants to renegotiate the bailout terms with its international creditors, which consists of the European Central Bank, European Commission and the International Monetary Fund, known in short as the Troika (derived from a Russian word, meaning a trio).

Assuming that Tsipras's Syriza Party wins the pending elections in January, then the concern investors would have is that the Troika and Syriza are unable to strike a deal on the new bailout terms. That would then force Greece into a disorderly default.

The four year bailout terminated in December 2014 but the creditors extended the term by a further two months to give Greece more breathing space in order to meet the demands from international lenders

The other potential horse in the political show is the current governing New Democracy, which is centre right of the political spectrum.

Prime Minister Antonis Samaras New Democracy would be the financial markets choice. The party emerged as the winner in Greece’s last national elections in June 2012 and has, as the leader of the coalition government, been in charge of the reforms and austerity measures agreed in the bailout conditions. But with Greece in a depression and plagued with mass unemployment, the electorate may have had enough and will vote in anyone who calls for an end to austerity.

Looking behind the political rhetoric of erudite politicians jostling for votes, what we have is a political crisis amplified by corporate controlled mainstream to create another money spinning opportunity for the traders.

It is probably true that the Greek electorate have had it up-to their eyeballs with austerity and Prime Minister Antonis Samaras New Democracy. Chances are that they may even boot out New Democracy and thrust into power the Syriza Party.
So what would we have?
Just a different player and a new face, but it’s the same game. Behind the charade and the charisma of an erudite politician, nothing really changes. After all, the true power brokers pulling the strings just wouldn't let it happen.

Syriza Party has made it an election pledge to end austerity to get elected, but when in power it would be another matter. Tsipras may talk the talk and walk the walk, but he can't spend what he doesn't have and if he slams the door on his creditors, well that would make matters even worse.
How many politicians have actually stuck to their election pledges?
I envisage a rocky moment for the euro and peripheral bonds leading up to the Greek election. Price may drift lower during the pre-election period and then a trend reversal post Greek election as uncertainty subsides and things turn to normality.


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