European Debt Crisis Not Calmed By Greek Elections

The Greek electoral outcome has not changed the trajectory of the European debt crisis. At best, it will provide a very brief lull in the continuing European storm. The inability of Greece and other countries to support their debt burdens without significant haircuts to bondholders and/or other forms of financial aid, and Germany’s refusal to underwrite the finances of the eurozone, are both ticking time bombs still looming on the horizon.

Markets look set to breathe a huge sigh of relief following the New Democracy’s slim victory over the far left, and fiercely anti-bailout, Syriza party. Thanks to the 50-seat bonus awarded to the victor, the most recent projections are that that the two pro-bailout parties, New Democracy and Pasok, will be able to form a slender governing majority. The most likely short-term scenario is that this governing coalition will pledge to continue to abide by the conditions of the bailout in exchange for minor concessions, such as reducing the interest on its loans and/or lengthening repayment periods.

Unfortunately, all this will not alter Greece’s dire predicament. It will still be unable to meet its bailout conditions and deficit targets. The economy will continue decline, and yet another government collapse cannot be ruled out. Further, whether or not Greece stays in the eurozone, it will be unable to overcome its debt burden. The same is increasingly likely for other indebted countries such as Portugal, Ireland and perhaps even Spain. The only question is who will pay the bill.

All this sets the stage for a growing confrontation between Germany and France. President Hollande’s socialist party won an absolute parliamentary majority yesterday. This could further embolden France to place additional pressure on Germany to accept jointly-guaranteed eurobonds and/or euro-wide bank deposit insurance in an effort to lower borrowing costs and prevent bank runs. However, convincing Germany that it should be on the hook for spending decisions of other countries will be a nearly impossible task. Recent polls show about 80% of Germans are against eurobonds. The populations of the Netherlands, Finland and Austria are also strongly against eurobonds.

Complicating matters even further is that public opinion in many European countries is largely against ceding authority to the European Union (EU) on budgetary matters. France’s recent actions are a case in point. Despite EU opposition, it recently reduced the retirement age for certain French citizens to 60 from 62 and has promised to raise the minimum wage and hire 60,000 teachers. How can one expect Germany to underwrite the finances of the eurozone when not even France is willing to limit its spending? Germany is already on the hook for 280 billion euros of the bailout fund. This does not include the potential costs of recapitalizing the European Central Bank (ECB). Indeed, one can only imagine how much it would cost Germany to provide long-term support to Italy and Spain. Their combined economies are approximately equal to Germany’s.

To conclude, the outcome of the Greek election has not solved any of the challenges facing Greece and the eurozone, and at best will have provided the markets with only a very brief pause in the ongoing European debt crisis.

Discloure: General – National Bank Financial (NBF) is an indirect wholly owned subsidiary of National Bank of Canada. National Bank of Canada is a public company listed on Canadian stock exchanges.

The particulars contained herein were obtained from sources which we believe to be reliable but are not guaranteed by us and may be incomplete. The opinions expressed are based upon our analysis and interpretation of these particulars and are not to be construed as a solicitation or offer to buy or sell the securities mentioned herein.

Research Analysts – The Research Analyst(s) who prepare these reports certify that their respective report accurately reflects his or her personal opinion and that no part of his/her compensation was, is, or will be directly or indirectly related to the specific recommendations or views as to the securities or companies.

NBF compensates its Research Analysts from a variety of sources. The Research Department is a cost centre and is funded by the business activities of NBF including, Institutional Equity Sales and Trading, Retail Sales, the correspondent clearing business, and Corporate and Investment Banking. Since the revenues from these businesses vary, the funds for research compensation vary. No one-business line has a greater influence than any other for Research Analyst compensation.

Canadian Residents – In respect of the distribution of this report in Canada, NBF accepts responsibility for its contents. To make further inquiry related to this report, Canadian residents should contact their NBF professional representative. To effect any transaction, Canadian residents should contact their NBF Investment advisor.

U.S. Residents – With respect to the distribution of this report in the United States of America, NBF Securities (USA) Corp., an affiliate of NBF, accepts responsibility for its contents, subject to any terms set out above. To make further inquiry related to this report, United States residents should contact their NBF Securities (USA) Corp. professional representative. To effect any transaction, United States residents should contact their NBF Securities (USA) Corp. investment advisor.

UK Residents – In respect of the distribution of this report to UK residents, NBF Securities UK has approved the contents (including, where necessary, for the purposes of Section 21(1) of the Financial Services and Markets Act 2000). NBF Securities UK and/or its parent and/or any companies within or affiliates of the National Bank of Canada group and/or any of their directors, officers and employees may have or may have had interests or long or short positions in, and may at any time make purchases and/or sales as principal or agent, or may act or may have acted as market maker in the relevant securities or related financial instruments discussed in this report, or may act or have acted as investment and/or commercial banker with respect thereto. The value of investments can go down as well as up. Past performance will not necessarily be repeated in the future. The investments contained in this report are not available to retail customers. This report does not constitute or form part of any offer for sale or subscription of or solicitation of any offer to buy or subscribe for the securities described herein nor shall it or any part of it form the basis of or be relied on in connection with any contract or commitment whatsoever.

This information is only for distribution to Eligible Counterparties and Professional Clients in the United Kingdom within the meaning of the rules of the Financial Services Authority. NBF Securities UK is authorized and regulated by the Financial Services Authority in the United Kingdom and has its registered office at 71 Fenchurch Street, London, EC3M 4HD

Copyright – This report may not be reproduced in whole or in part, or further distributed or published or referred to in any manner whatsoever, nor may the information, opinions or conclusions contained in it be referred to without in each case the prior express written consent of National Bank Financial.

NBF is a member of the Canadian Investor Protection Fund.