January 29, 2015

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Under Siege

Within two days, Syriza managed to spook the markets completely. Greek bank shares suffered their worst one-day loss on record. Greek financial shares plunged by more than 26% on Wednesday as investors took fright at prospects of a prolonged standoff between Athens and its European partners which could worsen deposit outflows and threaten bank liquidity, Reuters reports. A sell-off in Greek debt also accelerated on Wednesday, sending short-term borrowing costs to their highest level since Greece’s 2012 debt restructuring. In the space of a few hours, the yield on three-year Greek bonds jumped 2pp to almost 17%, writes the FT, as investors wondered whether Greece would honour its debts in the near term. Yields on Greece’s 10-year securities rose to 10.4% since Monday while credit-default swaps jumped, signalling a 70% probability the government will fail to meet its obligations within five years, up from 59% on Jan. 23, according to Bloomberg.

There are a lot of unconfirmed rumours out there, which did not help. One is that Stournaras is to resign as central bank governor, according to ereportaz. Deputy PM Yiannis Dragasakis said on Wednesday that he would meet with Eurobank on Friday to discuss the banks future but played down the significance of the fall, saying that turbulences are to be expected. 

In his first cabinet meeting Tsipras said: “We do not plan to head into a mutually catastrophic clash but we will not continue the disastrous policy of submission,” adding that his government was “ready with realistic proposals on the issue of debt and investments.”  The premier set out his government’s four chief priorities – tackling the country’s “humanitarian crisis,” rebooting the economy, seeking a solution to Greece’s debt problem, and clashing with vested interests. Off the camera, Tsipras reportedly advised his ministers to refrain from travelling business class (for flights lasting below 4 hours), to limit personal guards, assistants, consultants and the use of cars.  

Some ministers already announced anti-austerity measures in television programmes ahead of the official announcement next week. Among the pre-announed measures are scrapping fees in public hospitals and prescriptions, the halt of the privatisation programme, restoring “the 13th pension” for low-pensioners, raising the minimum wage to €751 gross, and restoring the collective bargaining system, as listed by KeepTalkingGreece. The government also pledged a re-hiring of those who were unconstitutionally laid-off from the public sector into the mobility scheme, namely school guards, cleaners and teachers. The official announcements are expected on February 5, when the coalition will seek a vote of confidence in the Greek parliament and elect a president. 

Robert Shiller suggested that markets might be overreacting by wiping out 15% of the Greek stock values since the election. "The price of Greek stocks is “below anything I’ve seen in the U.S. and suggests a spectacular investment,” he said according to Bloomberg. Also decisively more positive than market sentiment was Daniele Nouy, the chair of the European Central Bank’s Supervisory Board, saying that Greek banks are capable of surviving the current market turbulence, according to this story.

The Bloomberg article also quotes unnamed sources saying that the deposit flight accelerated to record levels last week. Withdrawals from Greek banks exceeded €14bn in the run-up to the snap elections, including €11bn in January alone. Between Jan. 19 and Jan. 23, outflows were greater than in May 2012, when Greece was on the brink of exiting the euro area, according to that source.

There are also knock-on effects for other periphery countries, writes the FT. It sent 10-year Spanish bond yields up 5 basis points to 1.45 per cent and Italian yields up 7 basis points while prices rose for German bonds, considered the eurozone’s haven investment, sending the yield back down to 0.35%, towards its record low.

Our other stories

Our coverage is focused mostly the dramatic situation in Greece, and the reactions from Germany and from Spain. We also write about the Italian presidential elections, about Mark Carney’s foray into the eurozone debate, and about the Bundesbank’s complaint over excessive ECB salaries.

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