Snap Election in Greece Will Test Euro Again; Add to Dollar Strength

12/29/2014 5:29 pm EST

Focus: GLOBAL

Jim Jubak

Founder and Editor, JubakPicks.com

Today's vote in Greece will force elections for a new parliament, yet the financial markets are treating this as a purely Greek issue, but MoneyShow's Jim Jubak thinks the markets are underestimating the likely turmoil of a Greek exit.

So much for heading off another round of the Greek euro crisis.

Today's vote in the Greek parliament ended with the government of Prime Minister Antonis Samaras short of the votes it needed to name a new Greek president. That will force elections for a new parliament on January 25. The opposition Syriza party leads in opinion polls.

Which is important, since Syriza opposes the austerity measures imposed by the country's creditors in exchange for a $305 billion bailout package.

Syriza has promised to annul the bailout agreement and vows to renegotiate repayment terms on loans from EuroZone countries and on Greek bonds owned by the European Central Bank. In addition, the party has said it will rollback cuts in the size of the government workforce and in salaries and pensions.

Syriza does not advocate leaving the euro, but it's hard to see how its program is compatible with continued EuroZone membership. Which means that the issue will come down to a decision by EuroZone members either to give in to what amounts to a threat to leave the euro or to tell Syriza to take a hike. (The treaties establishing the euro don't provide a mechanism by which a country can leave the currency union.)

So far, financial markets are treating this as a purely Greek issue and there's been relatively little impact on the bonds of other debt-crisis countries in the EuroZone. The yield on the 10-year Greek bond rose 1.32 percentage points to 9.8% as of 5:00 PM in Athens. Greek stocks closed down 4% for the day. But yields on the 10-year Portuguese bond rose just 4 basis points t 2.73%.  Yields on the Spanish 10-year climbed 1 basis point to 1.68% and on the Italian 10-year 6 basis points to 2%. (100 basis points equal 1 percentage point.)

I think the market is correct in assuming that the Greek crisis won't easily become a Portuguese, Italian, or Spanish crisis. But I also think that the financial markets are underestimating and underpricing the likely turmoil of a Greek exit and the strength it would likely add to euro-skeptic, rightwing parties in France, the United Kingdom, and elsewhere in Europe. Painful austerity plans in countries besides Greece will become bigger-and not smaller-political issues if Syriza wins and pursues its professed agenda.

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