Recent events have served to bring forth the economic fears of many governments and central banks, the most dramatic of which have been Switzerland’s removal of the 1.20 floor on the EURCHF pair on January 15 which sent currency markets into turmoil, and the second being last week’s decision by the European Central Bank to buy 60 billion euros worth of assets each month as part of a quantitative easing program which far outstripped original expectations.
The past six years have been plagued by bailouts, flagging national economies across the European Union, low productivity and nationalization of entire banks as debts became unserviceable.
With the European Central Bank currently exposed to approximately 190 billion euros, approximately a third of its capitalization, as a result of having invested in bonds in the open markets as a way of reducing the interest rate that Greece must pay on market borrowings.
Giving rise to a very dangerous fiscal practice was the period during which the ECB began taking Greek bonds as collateral against loans to entities such as the already struggling Greek banks. In turn, this was a precarious position, as if there is a devaluation of the bonds, the entire lot will all go bust immediately, leaving the ECB with that collateral which is now worth so much less than the loan against it that it will (near, maybe,) wipe out the ECB’s capital.
Austerity has never been a concept which a populace which has become accustomed to relying on bailouts and state sponsorship readily accepts, thus the Greek elections have now added a further concern to the already grave existing worries for other European nations, and the Euro currency’s future, in the form of the election of an anti-austerity socialist party in Greece.
In a report by British newspaper the Daily Mail during the night, after 97 per cent of the votes had been counted, radical leftist party Syriza was set to have 149 seats in parliament – just short of the 151 it needs to rule outright.
It won 36 per cent of the vote, compared to 28 per cent for the ruling conservatives, in a stark message to the EU despite the outgoing Prime Minister warning Greece would be on the “brink of catastrophe.”
British Prime Minister David Cameron further stated that the result would “increase economic uncertainty across Europe.”
The Euro hit an 11-year low within hours of the result, trading at $1.1098 – down 0.8 per cent and its lowest level since September 2003.
As outgoing premier Antonis Samaras phoned Syriza’s leader to concede defeat during the night, jubilant supporters waved flags on the streets of Athens.
“The Greek people have spoken”, said Mr Samaras in a televised statement. “Everyone respects their decision. My conscience is clear,” he said, whilst incoming party Syriza’s leader Alexis Tsipras told a rally of thousands of supporters he would defeat “austerity which destroys our common European future.”
Mr. Samaras’ far-left party wants to renegotiate the terms of Greece’s 240 billion Euro bailout with the EU and the International Monetary Fund. It says repayments are stifling Greece’s chances of recovering from a six-year recession, but its popularity spooked markets which fear a new financial crisis could push Greece out of the Euro. Syriza party spokesman Panos Skourletis said it was “a historic victory that sends a message that does not only concern the Greek people, but all European peoples.”
The Syriza victory in Greece, with its controversial anti-austerity stance, could become a catalyst which polarizes opinions in the forthcoming Britsh general election. Britain is home to the financial powerhouse which is London’s Canary Wharf and colloquially named Square Mile financial district, both of which are home to the world’s largest FX dealers, banks, institutional liquidity providers and interdealer brokers.
There is no other region across the entire EU which has a financial markets economy even remotely close to that of London, therefore it is likely to be of great concern to business leaders in the UK as to whether sponsoring a continually sinking Eurozone is a viable option long term.
Britain’s national economy is still struggling to recover from the 2008 financial crisis which resulted in major banks being nationalized and severe implications for small businesses across the nation, however its electronic trading sector survived and is still the largest in the world, largely due to advanced infrastructure, large institutional trading desks and international business from across the globe from Singapore and Hong Kong to Russia and North America – not mainland Europe.
It is therefore likely that the markets have not yet seen the lowest point in the euro’s jaded performance thus far.