Update on Eurozone Crisis

Greece will go to new elections on the 17th of June after last month’s poll failed to produce a result that allowed the country to form a government.

The radical left wing coalition party SYRIZA managed to increase its vote in last month’s election from around 4% to over 16%. This put them into second place behind the centre right New Democracy.

SYRIZA is heavily opposed to EU austerity measures. Opinion polls after last month’s election put SYRIZA on as high a share as 28% in the June election, which would give them around 70 MPs.

Under Greece’s electoral system the party that comes first gets an automatic 50 extra seats to try and form a government. However, in the last week the New Democracy Party has begun to gain ground on SYRIZA with polls suggesting both parties at between 22 – 24%.

The election is still on a knife edge and it appears many voters from smaller parties are lining up behind the larger parties to try and influence the result. If SYRIZA comes in first in the election then it seems clear that New Democracy and the former governing left party PASOK will be unable to form a government; and SYRIZA may well be able to form a coalition with other parties opposed to the bail out like Independent Greeks or the Communist Party. If this happens there seems to be no mood in the EU to renegotiate the terms of Greece’s bail out and the IMF and ECB funds that are keeping Greece afloat are likely to be suspended forcing Greece back to the Drachma.

The likely result of this will see a period of 2-4 weeks of EU-wide instability with the yields paid by countries like Italy, Spain and even France shooting up making current borrowing requirements unsustainable. The crisis is likely to get so bad that it will force the Eurozone to finally adopt Eurobonds. This is likely to solve much of the problem and finally abate the European Debt Crisis. At present Germany, Austria and the Netherlands are opposed to Eurobonds. However opinions are changing. The Netherlands have recently called a general election because the government was unable to gain support from parliament to pass austerity measures as part of the Eurozone Austerity Pact.

In Germany Angela Merkel’s party showed poorly in recent local elections with voters rejecting austerity. While Merkel remains popular and her CDU party is still coming in first, the party she is in coalition with has been hit hard and if she is to remain chancellor next year she will have to re-form the grand coalition with the main left party The SPD.

The SPD are said to be in favour of Eurobonds to once and for all solve the EU debt crisis. Despite its tough talk on austerity the German parliament is yet to ratify the Eurozone Austerity Pact and it now looks increasingly unlikely that Merkel will gain enough support for it.

The net result of all of this is that there is a good chance that Greece will exit the Euro soon. The knock on effects will be a crisis of confidence across Europe. In the medium to long term, this may well be the best result as it will finally force EU leaders to take extraordinary measures to solve the crisis once and for all.

In the short term, it is likely to be preferable to hold assets in US dollars and government bonds. However there is likely to be a significant opportunity to jump back into equities following the Greek elections.

 

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