Greek election looms as ECB weighs QE

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by Chris Becker

It’s getting close to three very important dates on the economic calendar that all investors should watch and prepare their risk management accordingly. First, the German 2014 GDP print later this week will precede the first ECB meeting of 2015 on the 22nd of January where some sort of QE program is likely to be announced, although its legality is being questioned.

Texture from Reuters:

A landmark legal opinion this week will remind the European Central Bank of the limits it faces as it advances towards money printing, while a tumbling oil price saps inflation in debt-strained Europe.

 

It is the latest chapter in a long-running and increasingly bitter dispute about quantitative easing (QE) between the ECB and Germany, the largest member of the 19-country bloc, that is likely to limit the size or scope of such a program.

As the debate continues, the euro zone economy is all but grinding to a halt. Germany is expected to announce modest growth on Jan. 15 for last year.

Its Bundesbank has warned that buying bonds issued by euro zone governments — including politically brittle Greece — could leave it on the hook for losses.

Next week, an adviser to Europe’s top court will give his opinion on a challenge by a group of Germans to an earlier ECB bond-buying program. If he shares any of the concerns of Germany’s constitutional court, which referred the case to European judges, it would be significant.

Alain Durre, an economist with Goldman Sachs, said this could lead to the ECB setting a fixed limit on its bond-buying plans or to take priority over other investors when it buys state bonds.

Well of course it could lead to losses, thats the whole point of capitalism! It seems the banking culture of all reward, no risk has turned into a virus worse than the zombie like southern European economies.

The second is the Greek election three days later, with news the party no-one at the troika (European Commission, the ECB and International Monetary Fund) wants in power, Syriza, is leading the polls:

According to a poll by pollster Alco, Syriza, which opposes Greece’s international bailout program, would garner 33.1 percent of the vote, versus 29.7 percent for the party of Prime Minister Antonis Samaras, a gap of 3.4 percentage points.

Support for both parties fell slightly compared to the survey carried out by the same firm last week, when the gap came in at 3.3 percentage points, according to the weekly Proto Thema newspaper.

A poll conducted by Kapa Research for To Vima newspaper showed Syriza was 2.6 percentage points ahead of Samaras’ New Democracy party, compared to its 2.5 point lead in a poll last month.

If undecided voters, who totaled 16.5 percent of those surveyed, were added to Syriza’s count, the leftist party would garner 33.7 percent of the vote, which would secure the party 143 lawmakers in the 300-seat parliament, just short of an outright majority.

We’ve had many iterations of a “Grexit” being manageable, then “not possible” and not “on the agenda” from the mandarins within the Troika but there hand might be forced if these polls reflect the outcome at the ballot. This could mean a repeat of the 2010 risk-off event as it sets up a cascade of events for other exits and even, as Bloomberg has started to catalog, a return to pre-Euro currencies, like the Drachma.

From Forexlive, where it looks like the terminal makers are hedging their bets already:

Greek-drachma-on-Bloomberg-1-12-January-2015-650x396

Regardless of the outcome, the bailout remains in place for Greece until the end of February so we’re likely to see another month or two of volatility. There’s already been reports of deposit outflows from Greek banks in anticipation of an exit.

It may all be out of the hands of the voters, Syriza and indeed the rest of Europe. For investors, the price of managing this risk is rising, and opportunities are lining up to take advantage of the volatility that will occur and probably endure for the rest of 2015.

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Comments

  1. Yeah I thought the Maastricht Treaty put constraints on sovereign debt buying? How will ECB get around that?

  2. Like the Irish vote on the Lisbon treaty, the Greeks will continue to vote until the correct party is elected.

  3. I think there is a lot of denial going on about the odds of Syriza not only winning but being able to form a government. There has not been a single poll out that has had them less than 2% in the lead for months. They are likely to end up with over 135 seats, which will mean an effort to deal without them will involve Golden Dawn and the old school Communists. And they are not going to get into bed with each.