Sunday, January 25, 2015

Greek Elections

So the Syriza party has won. FX markets are opening back up and as you can see the EURUSD is back under pressure to the downside.

There is nothing surprising about this election nor about the movement of the EURUSD. The Greek tragedy is far from over however. Syriza is going to negotiate hard with the ECB and the EU. I don't see any scenario where they won't ultimately leave the EU which would be in their best interest. What's not in their best interest is embracing more socialism as the solution to their problems. The Greek government is completely bloated even under the current austerity measures. The Syriza party wants to subsidize pensions and maintain government jobs with money the government that doesn't exist and considering that Greece will not have access to global capital markets for awhile their only option will be to print Drachmas. This will lead to hyperinflation and then a rise in even more extreme political parties such as Greece's neo Nazi group Golden Dawn.

The best thing Greece could do is right now is have an honest conversation with their citizens and tell them the truth is that there is no way the government will fund all its promises. Greece should go for a full default and hit the reset button by trimming their government by about 90%. This of course will not happen because it's the harder route and people want to be told there's a magic solution to their problems. As a reminder Syriza's platform was to end austerity not increase it. The hard truth is that the country over borrowed and over consumed for many years and now the bill is due.

Europe is in tough shape and fragmentation of the EU is only going to spread. None of this is news to our clients and friends whom we've been saying this to for the last five years. Here's the call I'm going to reiterate right here and now: the Euro currency will not survive the next five years. It was flawed from the beginning and now those flaws are becoming visible.

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