Greek elections on June 17th are a huge risk event for all the world’s currencies. They are timed just before a summit of G-20 leaders.
What are the possible outcomes and the impact on currencies?
After 5 years of recession, Greeks abandoned the two mainstream and pro-bailout parties: PASOK (left) and New Democracy (right). Parties that were on the sidelines in previous elections won many seats, and the SYRIZA party emerged as the strongest of them all.
New King: Alexis Tsipras
SYRIZA, is a coalition of radical left parties, led by the young and charismatic Alexis Tsipras. Tsipras clearly stated that his party will abandon the bailout program, known as the memorandum in Greece.
He also said that Greece will stay in the euro-zone, as a Grexit would inflict a lot of damage on Europe. It’s hard to see that happening: if Greece doesn’t have money, it will need to print a new currency.
In the current situation, leaving the euro-zone, not paying debts and starting with a weak currency could eventually benefit Greece, as other examples show. Yet this will definitely hurt European banks and the euro, and could start a domino effect.
Election Run Up
In the weeks that passed since the date was set, opinion polls have been mixed, with some putting SYRIZA in the lead and others putting New Democracy up front.
One thing is clear: these elections are a choice between continuing the current path of austerity and obeying international creditors, or choosing a different path of abandoning the program and the euro. The two parties gained against all the rest.
The publication of polls is forbidden in Greece in the last two weeks before the elections, but “secret” polls will surely leak and impact the euro.
According to Greece’s political system, the party that wins gets an extra 50 seats in parliament, or one sixth of the 300 seats. So in order to get an absolute majority, one third of the votes are needed.
An absolute majority isn’t necessary to form a government: SYRIZA could make a coalition with the Democratic Left which opposes the bailout program but is more pro-European and has a softer stance. New Democracy could form a coalition with PASOK.
What’s important is who comes first, but a third scenario is also on the cards.
- SYRIZA wins: This scenario has high chances as the party is gaining momentum in the current gloomy environment. This will escalate the capital flight out of the country and could bring the country out of the euro-zone before Tsipras makes any decision as Prime Minister. It could also trigger action from world leaders convening in Mexico on June 18th. The immediate reaction will likely be a big drop in the euro and a stronger dollar (and yen).
- New Democracy wins: This scenario is certainly on the cards. The reasoning is that many Greeks voted to smaller parties as a protest, and will now “come back home” to mainstream parties. In this scenario, the euro will leap in the morning after, but this doesn’t solve Greece’s problems. A third bailout and more restructuring will probably be necessary. A temporary relief will result in the focus shifting to other countries.
- Another Deadlock: This scenario has low chances, but if the parliament is fragmented once again with no party gaining even 20% (like in the first round), a third round of elections will be scheduled, but things will continue deteriorating. June 30th is the deadline for passing 77 measures. This is a prerequisite for more aid, and it’s hard to see that happening by a caretaker government.
All in all, this is a major risk event that impacts the entire world.
Trading the Event
Trading the Greek elections is similar to trading the Greek exit. One way is “bet” on the outcome and take a position on Friday, yet this is a very risky tactic, as nobody really knows how Greeks will vote.
Another option is to wait for the market to open, when the result is already known and to catch the move. It’s important to remember that markets tend to overreact and a violent correction will likely follow the initial move. This is a big event, and this means that very strong technical lines could be easily overrun. Trade with care.
For more, see how to trade the Grexit.
This article is part of the Forex Monthly Outlook for May. You can download it by joining the newsletter in the form below, which appears on any article on Forex Crunch.