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BY SHAVASB BOHDJALIAN
Greek voters punished the mainstream parties and rejected the tough austerity package dictated by the Troika, with New Democracy and Pasok losing their majority in parliament. Though the election result was well expected, with the runner up, the left wing Siriza dead against the euro aid package, it will be interesting to see what kind of coalition will be formed and more importantly, if it will survive.
Many are saying that the Greek people have spoken and indirectly opted for an exit out of the eurozone, since it was made obvious to them that the option of “we stay in the eurozone but don’t want the package” was and is off-the-table.
Greece's vote, combined with the victory of Socialist Francois Hollande over incumbent Nicolas Sarkozy in a French presidential election, will cause friction with Germany on whether the eurozone follows the German inspired medicine of strict austerity or opts for the growth-oriented policies of Hollande.
The other main worry is if markets smell an opportunity and attack the vulnerable eurozone states of Spain and Italy, which are both considered “too big to fail” and for whom EU leaders have lined up a massive EUR 700 bln fund, which may receive up to EUR 430 bln in additional funds from the IMF. The ECB meanwhile, has made up to EUR 1 trillion in 3-year soft loans available to EU banks.
Market participants are now waiting for Hollande to make his first visit to Germany and introduce his growth-oriented policies which according to an analysis by Reuters include steps to increase the firepower of the European Investment Bank (EIB), make more flexible use of EU structural aid funds and so-called "project bonds" to fund investment in infrastructure projects like highways, bridges and energy networks.
All analysts agree that Hollande can ill-afford to weaken France's own commitment to deficit reduction or jeopardize its relationship with Germany by pushing for bolder steps considered taboo in Berlin, like joint euro zone bonds, big stimulus programs or delays in meeting fiscal targets.
Personally, I would like to see how Hollande will reduce the sheer size of French government and push with his plans to reduce the retirement age to 60, increase the minimum wage and impose a 75% tax on all those earning above EUR 1 mln a year. Standard & Poor's, which stripped France of its triple-A rating in January, said Hollande's victory had no immediate impact on its creditworthiness, though it would scrutinize his policy choices.
Uncertainty with respect to what measures Hollande will introduce, combined with a weak coalition taking over in Greece which may not be able to push through the painful austerity measures is certainly going to spook markets and hurt sentiment in the euro, which on Monday finally broke below 1.3000 against the dollar.
The economic news from the eurozone and the US were also negative. In the EU, the purchasing manager indices, which mainly focuses on the services sector fell sharply, suggesting recessionary conditions and raised questions why the trillion euros in loans that the ECB has provided to the banks are not channeled into the main economies. Meanwhile in the US, the number of new job creations was only 115.000 compared to expectations for more than 170.000 jobs growth. Though the US unemployment rate fell to 8.1% from 8.2%, many investors are worried that the pace of the recovery in the US is erratic and there are increasing fears that China is also entering into a slow-growth environment.
All the above developments are euro-negative and if the euro does not manage to recover above $1.3000 on a closing basis, then based on technical models, it may well decline towards the 2012 low of $1.2623. According to a Reuters report, Nomura is now forecasting that the euro would fall in the near term to a range of $1.26 and $1.28.
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(Shavasb Bohdjalian is a certified Investment Advisor and CEO of Eurivex Ltd., a Cyprus Investment Firm, authorized and regulated by CySEC, license #114/10 and approved by the Cyprus Stock Exchange to act as Nominated Advisor for listings on the Emerging Market. The views expressed above are personal and do not bind the company and are subject to change without notice)
