Greek elections may delay ECB QE plan
As always in the Eurozone, politics continuously complicate the actions of the European Central Bank with the Greek elections potentially providing the latest spanner in the works. In the short-term there's an outside chance that this could be mildly supportive for the embattled EUR.
Had it been down to ECB President Mario Draghi, the Eurozone would have had a quantitative easing programme some time ago. He's had to overcome bitter opposition, particularly from Germany, which in some quarters is still opposed to a QE programme.
On January 22, the ECB meets to decide on monetary policy and the recent flash estimate of Eurozone CPI at -0.2%, y-o-y, for December is certainly a good tail wind to announce a deflation fighting policy.
However, on January 25, Greece holds elections with opposition party Syriza running on an anti-austerity ticket and is tipped to potential win. That outcome would complicate the ECB's decision making because Greece has been bailed out by Eurozone institutions, the IMF and receives support for its financial system from the ECB.
Greece reneging on the deal and then with Greek government bonds being bought by the ECB would look like rewarding bad behaviour, which would play badly with other Eurozone countries – not just Germany.
EUR/USD – QE delay could stem pace of fall
Easier to wait?
The easiest course of action would be to delay QE – a possibility – until the Greek elections are over and if Syriza did win the ECB could then wait to see how a deal pans out between Greece and the Eurozone.
A Syriza victory could drive the EUR lower at first. Also, the dynamics of a negotiation would be tense as Syriza would want to demonstrate to its electorate that it can get a good deal for the country, while Eurozone authorities will want to be seen to be only giving minimal ground and not to be rewarding past profligacy.
Therefore a period of long drawn out negotiations could take some selling pressure off the EUR as it's unlikely that Greece would leave the Eurozone – it's an outcome neither side particularly wants, especially during a period of heightened uncertainty. In true European fashion some political face saving fudge would likely be hatched by both parties.
Another possibility is that the ECB simply only buys the most highly rated government bonds, such as those of countries like Germany, France and the Netherlands. This would be seen as unfair by those left out (and not in the spirit of European solidarity) – however yields would likely tighten in the peripheral Eurozone countries as well on arbitrage trading.
It would however probably be simpler – politically at least – to buy bonds of all Eurozone countries at the same time and waiting for a resolution to the Greek situation may be seen as the best course of action by the ECB.
By Justin Pugsley, Markets Analyst, MahiFX