The election results from Greece reduce the near-term risk of it exiting the euro, but don’t do anything to resolve the ongoing European fiscal crisis, economists say. Indeed, Greece’s exit may merely have been delayed.
“The Greek electoral outcome has not changed the trajectory of the European debt crisis,” says National Bank Financial Inc. in a new report. “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 euro zone, are both ticking time bombs still looming on the horizon.”
CIBC World Markets Inc. also sees “challenging days” for the euro still ahead. Doubts about Greece’s ability to achieve its austerity goals, concerns about other troubled eurozone countries, such as Spain, and fears that it will be unable to grow its way out of its fiscal and economic perils, are still hanging over markets, it notes.
“The weekend’s election victory means that markets can cross off a key political hurdle, and monetary policy makers are under less pressure to take bold steps to support market confidence for now. But the critical ingredient missing from the eurozone recovery is growth, and it’s still unclear how economic acceleration can be achieved with Spanish housing deflation, Greek bank depositor drainage, rising eurozone joblessness, structurally uncompetitive economies and punitive sovereign funding costs,” CIBC observes.
“Unless leaders can find ways to transform the region’s economic potential and ringfence risks from continuing to spill over into larger economies such a Spain, it may be too early for markets to put the eurozone’s problems to bed,” it adds.
For BMO Capital Markets, the key issue is Germany’s role in the region. “Until Germany is willing to foot the bill for much of the eurozone restructuring and acknowledge that monetary union implies further integration towards a fiscal, political and banking union, the crisis will continue,” it says.
TD Economics says that a coalition government formed by two historically antagonistic parties presents risks, and it still sees Greece leaving the euro. “It will be hard for the coalition to carry through with the structural reforms and the adjustments that are required under the program. In all, we believe Greece will have to restructure its debt once again and that the country will eventually leave the euro zone,” it says.
Fitch Ratings also cautions that the new Greek government is likely to be fragile. “While the risks from Greece have fallen for now, the severity of the systemic crisis engulfing the eurozone is unlikely to diminish until European leaders articulate a credible road-map that would complete monetary union with much greater fiscal and financial integration,” it says.
The rating agency expects that a new government that is supportive of the existing bailout programme is likely to be formed soon. As a result, it will not be placing all eurozone sovereigns on Rating Watch Negative, as it had indicated would be the case if a Greek euro exit were a probable near-term event.