Why has the air gone out of markets quite so quickly after an election result which delivered what many people consider to have been the best result in the circumstances? Investors’ relief has quickly evaporated as they look beyond the election to the fundamental problems of the Greek economy and broader issues across the rest of the eurozone.
HSBC’s David Bloom, head of foreign exchange strategy; and Janet Henry, chief European economist, have written a note this morning which sets out the tasks facing a new government in Athens. It makes for sober reading (with my notes in square brackets):
The current timeline is very tight, requiring the incoming government to quickly update the [budget] and identify additional [cuts], amounting to EUR11bn (5.5% of GDP), by the end of June, to [balance the government’s books] by 2014. Only once these have been approved by the Troika [the IMF, the ECB and the European Commission] will Greece receive the planned EUR31bn of funding, including EUR23bn for bank recapitalisations.
[…] A short delay [in payments from the international authorities] would not be catastrophic as the share of the tranche that is required for bond redemptions (mainly to the ECB) is not needed until August. Assuming that hurdle is crossed, the fact remains that the challenges facing Greece are still huge, and with the economy still mired in recession and very high [debts], solvency concerns will persist. Hence this election outcome is unlikely to put the prospect of euro exit for Greece on the backburner for long. The quarterly reviews [by the Troika] will still be nerve-wracking.
In sum, Greece needs foreign bailout cash to function.
If it slips up in the commitments it has made to slash government budgets that cash may dry up. HSBC (and many others) think it’s a tall order and so a ‘Grexit’ is still on the cards.
That’s one reason why markets are looking so rocky even before a coalition is formed.