Syriza Wins, What now for the Euro Area?

As most pre-election polls anticipated, the former Greek opposition party Syriza has swept to victory in the elections in Greece over the weekend. The results sets the scene for a period of confrontation between the Greek government and the EU, as the prime minister-elect Alexis Tsipras prepares to form a coalition to end austerity and end an era of international pressure to implement painful budget cuts.

In his victory rally, Tsipras said that there will not be any catastrophic clashes, however there will also not be continued bowing to all international demands. In the build up to the election he also stated that he will be looking for a portion of the Greek debt to be written off, since, as it stands, the country is not on a sustainable path to get itself out of the current slump. As a reaction to the news, the Euro fell to a fresh 11-year low before recovering its losses and equity markets have opened weaker this morning. Greek government bonds prices fell sharply, with the yield on 10-year Greek debt increasing to 8.5% from 8.17% prior to elections.

Syriza’s victory sends a signal to parties such as Spain’s Podemos that are challenging economic and political conventions across Europe from a country whose output has shrunk by about a quarter and where one in two young people are jobless. Should an aggregation of conflict parties come to power, this would set the scene for further division within the EU. In my opinion, the gloom and doom and strong sweeping statements by the opposition are eventually toned down once the parties gain the upper hand as they come to the realisation that in practice the achievements the country has gained by being part of the EU shouldn’t be written off entirely as the welfare of the country is on a stronger footing with the backing of its neighbours.

Investors must now wait for Tsipras to spell out how his government plans to negotiate Greece’s future financing needs. The possibility of Greece disposing of the Euro as its currency appears to be minimal, as Tsipras himself repeatedly said that an exit by Greece or any other crisis country would be a disaster for Europe.

How to position yourself after the news

Following the expected victory of the Syriza party, I see no major change to the Euro area outlook. I remain bullish on stocks in the euro area following the expected financial asset appreciation following the ECB’s QE policy. I still expect the Euro to weaken further over the next quarters as the currency remains out of favour from a fundamental point of view, which should lead to further weakening until the euro shows concrete signs of getting back on its feet. I would avoid Greek debt for the time being until Tsipras lays out his plans for the reduction of debt; however I remain bullish on the sovereign debt of the remaining Eurozone countries, as yields are expected to continue to grind lower following last week’s QE announcement.