An upset for the Syriza party on Sunday in Greece cooled Wall Street expectations headed into the new week. The New Democratic Party of Greece barely overcame the leftist Syriza party to first place in Sunday's elections, as the New Democratic Party leader Antonio Samaras reaffirmed to his constituency the commitment Athens had to stick to in accordance with its international lenders. The New Democratic Party leader argued during the elections that a "Syriza-led government would inevitably cause funding to be cut off for Greece as a massive run on banks would ensue and force Greece out of the eurozone."
The Syriza party in Greece is said to continue to call out the New Democratic Party's bluff on a euro-exit, as a breakup of the euro bloc is not conventional as reflected in current state affairs. The euro area international trade is at a surplus of 5.2bn euros for Q1 2012. The first estimate for the April 2012 extra-EU27 trade in goods balance was a 12.0 bn euro deficit, compared with -17.2 bn in April 2011. In March 2012, the balance was -7.3 bn, compared with -13.1 bn in March 2011. EU27 exports year-over-year to most of its major partners grew in January-March 2012 compared with January-March 2011. So then why would pro-austerity measures dominate in Greece (as part of the European Union) over arguing the pro-growth point of view for further stimulus and sustainability in an overall growing European Union? If Greece leaves the European Union, this chain of events would inevitably lead to a potential breakup of the euro bloc due in part to a larger trade deficit from these actions.
Outside bond investors continue to pile into Greece, as well as other failing European Union countries like Spain, and Italy, to buyout government debt at a discount. Sovereign debt and financial-market debt are solely interconnected on macroeconomic factors for contributing to gross domestic product. Demand is still very high for Greek sovereign bonds as bid-to-cover on weekly government issuance is still on the rise. Everyone in Greece bought the NDP bluff, as Spain just sold 3.04 billion euros ($3.8 billion) of government bills, exceeding a target of a 3 billion cash raise for the government as demand for Spain's 12-month bills was 2.16 times the amount offered. The longer-term problem for Greece still lies in the government keeping to all its commitments and keeping debt-to-GDP at a minimum. Government is the biggest spender and contributor to GDP in Greece and accounts for the majority of growth in Greece at the moment. With an EU current account surplus and short-term stimulus from outside bond investors working for Greece at the moment, why do voters continue to rally behind pro-austerity governments across Europe? Fact: If a government spends on its infrastructure, as the biggest contributor to GDP longer-term, return on said investments will sponsor growth for the nation. Governments are predicted to spend more in any economic expansion.
A coalition government is now being formulated in Greece and is set to hit center stage as early as Wednesday, June 20th. The Wall Street Journal has reported, the combined forces of the socialist and of the small democratic left parties will hold 179 seats out of 300 seats in the new coalition. The new government plans to ask other eurozone countries for an extra two years to meet fiscal targets within Greece as all parties within the new coalition have agree that there should be no further cuts in pensions and salaries. This new government is also said to try more to ease some burden off over-indebted households. At the moment, Greece is still spending 1.379 euros abroad for every 1.000 euros earned abroad. That is a 38% excess of spending over income. Current account improvements have gained traction in Greece as the current account deficit declined 35% during the Jan 2012 - Mar 2012 period. Had Greece followed Mr. Tsipras' recommendation not to pay interest to foreigners, the current account deficit would have been reduced by half of the amount stated above.
Investors, in the end, will continue to buy sovereign debt from Greece as well as Spain at discounted prices and will continue to seek out secure Alpha returns for their investment portfolios. Investors will not run for the hills as said by the New Democratic Party leader Antonio Samaras, no matter what party is in power and regardless of political stripe. Greek elections and the New Democratic Party are caught single-handedly in this instance playing fear tactics against the investor community. There is just no changing the facts.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.