Why Greece Matters to the Euro

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Market Drivers January 26, 2015

Syriza gets majority in Greek Parliament EUR test 1100 but rebounds
IFO bit better than forecast
Nikkei -0.25 Europe 0.42%
Oil $45/bbl
Gold $1292/oz.

Europe and Asia:
EZ IFO 106.7 vs. 106.5

North America:
No Data

Another volatile night of trade in the currency market exacerbated by very low liquidity levels in the Asian session as Australia was off for holiday. News that the left leaning Syrzia party won majority in Greek parliament pressured the euro from the outset and the pair quickly fell to fresh multi-year lows below the 1.1100 level only to bounce hard and fill its opening gap.

Syrzia achieved majority status when the Independence party threw its support behind them and is now in position to form a new Greek government led by its young charismatic leader Alexis Tsipras. Mr. Tsipras remains a wild card on the global stage as his firebrand rhetoric has been tempered by promises that Greece will honor its budgetary commitments,although he clearly seeks to renegotiate the country’s crushing debt burden

It will be interesting to see if Mr. Tsipras can nudge the Eurozone towards mutualization of risk – a direction the union must move to if it has any hope of long term survival. Greece has not realistic way to lower its massive debt to GDP ratio except either by default or currency devaluation. As long as it remains in the union it will need to renegotiate its debt obligations if it is to have any chance of economic recovery. It’s doubtful that Mr. Tsipras will be able to negotiate debt forgiveness terms with the Troika, but he may be able to extend duration on the sovereign debt which would provide considerable relief to the Treasury.

Greece is one the smallest and least important members of the Eurozone and its situation within the region is unique, but it represents a key test of the EU model. The EZ was established not only as a monetary union but as a political idea whose ultimate purpose was to avoid the bloodshed of the past century by cementing ties between its disparate member nations. That by definition means unequal burden sharing as the stronger economies must help the weak. This is a lesson that Germany is still learning and if it does not master it soon it will face far, far greater problems with Italy and France that could truly endanger the EZ union.

For now the market appears to have breathed a sigh of relief that Mr. Tsipras has not assumed a more confrontational posture. The EUR/USD has tested support at 1.1100 twice and may be in for a short covering bounce especially if fears about political tensions begin to recede while the economic situation stabilizes. If this scenario holds for the next several weeks today’s price action may well represent a near term bottom in the pair.

Boris Schlossberg
Managing Director

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