Syriza's Victory is Not the End but the Beginning

As the demonizing of Syriza gives way to post-electoral analysis, its victory is being seen as anti-austerity not anti-EMU.  Politics makes for strange bedfellows, and a small conservative party Independent Greeks, have agreed in principle to form a coalition.   The period of political uncertainty that was a clear risk will not materialize, and a new government will be sworn quickly.  

This in turn will maximize the period for negotiations with Greece's official creditors.   The current support package was extended from December to the end of February.  A new agreement is needed going forward. Otherwise, the funding of Greek banks becomes questionable as the ECB has indicated that without an agreement, it could not longer accept Greek government bonds as collateral.  In addition, Greece has a 4.3 bln euro payment due in March.  Another chunky payment of 6.5 bln euros are due in the July-August period.  All told; some 28 bln euros are due this year and next.   

A key takeaway is the austerity regime over the last several years is producing social and political tensions that are pushing back.  Greece may be the proverbial canary in the coalmine.  Until now push back was dominated by populist right parties.  Syriza's victory will embolden Podemos in Spain. Spanish bonds are under-performing a bit today though we would not want to exaggerate that.   

Italy's presidential election process will begin towards the end of the week.  Prime Minister Renzi may compromise with Berlusconi (after the third round) in order, so the argument goes, to maintain support for his reform agenda.   It is unlikely to be as dramatic as events in Greece.  We note that the two main opposition parties in Italy claim they want to leave monetary union.  

In the run-up to the election, we have argued that talk of a Grexit was bombastic.  Nor do we think a default is particularly likely.  We have argued that there is plenty of room to reach an agreement.  In fact, for the last couple of years, following the restructuring of debt in private hands, the official sector has indicated a willingness to lighten Greece's debt servicing costs provided the country complete is commitments under the memorandum of understanding.    

Some observers claim that this is the same as default.  Yet the distinction is significant and has a long legal and diplomatic tradition.  Some observers claim that Greece is blackmailing its official creditors, but this is to take on a partisan attitude.  When one does it, it is called negotiation.  When the other does it, it is called blackmail.   

There are a four developments outside of Greece that should not go unnoticed. First, comments by BOE Governor Carney and MPC member Forbes sounded rather hawkish, warning a rate hike may come sooner than the market anticipates.  This follows on the heels of the MPC minutes last week that showed the two dissenting hawks capitulated.   Sterling is higher but in line with the euro.  The real place that the new rhetoric is being felt is short-term UK rates market.  The implied yield on December 2015 short-sterling futures contract, for example, is up six basis points today. This is one of the larger single day declines over the last few months.  

Second, the German sentiment is finding somewhat better footing.  Following the stronger than expected ZEW survey, the IFO was also better than anticipated.  The measure of the overall business climate improved to 106.7 from 105.5 and is the third consecutive monthly increase.  The measures of expectations and current conditions also improved.  

This is one of our interpretive points:  prior to the start of the ECB's new asset purchase program (March), there are indications that cyclical worst is past.  The PMIs are improving.  Money supply, which will be updated later this week, has begun improving.  Lending to households is slowly improving, as are business loans. 

Third, Japan surprised with a smaller than expected trade.  The December shortfall was JPY666.7 bln, which was 10% smaller than expected.  This was a function of a jump in exports.  Following the 4.9% year-over-year increase in November, Japan reported a 12.9% increase in December.  The consensus had expected a strong gain (11.2%).  Export growth to Asia, which receives almost half of Japan’s exports, nearly doubled to 11.0% from 5.8%.  Exports to China rose 4.3% year-over-year from 0.9%. 

Exports to the US jumped to 23.7% from 6.9%.  If such export growth to the US is maintained, it would not be surprising to see the US Treasury’s spring report give greater attention to Japan and the yen.  That said, Japan’s trade deficit in 2014 was a record. 

Separately, we note that BOJ’s Kuroda has suggested that if more monetary stimulus is needed, new assets would likely be included.  Currently, the BOJ is buying nearly all the new government bond issues.  This is impacted trading.  There is some thought that the BOJ would consider the bonds of regional governments, which are a JPY200 trillion (~$1.7 trillion) market. 

Fourth, increased hostilities in East Ukraine has sparked talk of additional sanctions against Russia.  This has taken a toll on the ruble and Russian shares.  Just as it had appeared that Europe was softening its stance on Russian sanctions, the Ukraine government appeared to have gone on the offensive, trying to liberate the airport and some territory in east Ukraine.  The rebel forces and Russia stepped up their efforts in response. 

Corrective pressures are evident in the foreign exchange market, where the dollar is weaker against most major currencies but the Japanese yen.  The dollar may continue to consolidate its recent gains without being distracted by US economic data today.