Heads up, forex traders! If you’re planning on trading the euro this week or if you already have euro positions open, you should definitely get up to speed on the Greek parliamentary election results.
This political event that took place over the weekend marks a turning point for Greece and its debt drama, as the Syriza party victory could put the country’s chances of securing its last set of bailout funds in jeopardy. As I’ve discussed in an earlier article on how Greece’s political troubles could affect the euro, the troika (ECB, European Union, and IMF) agreed to release the next tranche of aid under additional austerity conditions to which the previous government agreed. However, the anti-austerity movement has grown strong enough to overthrow Prime Minister Samaras and put Syriza leader Alex Tsipras in power.
The Syriza party has gained a lot of popularity among voters, as Tsipras has vowed to reverse most of the austerity measures and renegotiate Greece’s debts. “The troika for Greece is the thing of the past,” announced Tsipras. “Greece is turning a page, leaving behind disastrous austerity and five years of humiliation.”
While this sounds like a good idea for a country whose growth has been hampered by aggressive budget cuts and higher taxes, it might do much more damage to Greece’s finances. Economists worry that a prolonged stand-off between the troika and the new Greek government could spark more uncertainty and might even lead to a “Grexit”.
As you can see from the euro pairs’ charts this week, the shared currency gapped lower against its forex counterparts as market watchers speculated on how Greek political instability and debt troubles could make matters worse for the entire region. Recall that the ECB just announced a massive quantitative easing program last week in its efforts to ward off deflation and revive growth in the region.
An interesting aspect of the ECB’s QE program is that majority of the bond purchases will be conducted by the national central banks in the region, which means that they will be shouldering most of the potential losses if a euro zone government defaults on its debt – the chances of which have drastically increased for Greece. This might ruin the central banks’ balance sheets and limit their ability to spur lending in their respective countries, thereby hurting their own growth prospects.
Some analysts have even gone as far as suggesting that this could eventually lead to a break-up of the euro zone, which might be the worst case scenario if the new Greek government doesn’t get its act together soon. Sweeping economic reforms have been promised by the Syriza party, but their lack of experience in government suggests that the country may be facing very rough seas ahead.
Do you think this could mean further declines for the euro? Or are market participants over-reacting to this news?