Markets returned to relative calm after Greece’s new leftist Prime Minister Alexis Tsipras was sworn in Monday. Investors seem enthused about the European Central Bank’s planned stimulus and unfazed by Tsipras’ threats to help Greece avoid paying its debts.
Though the Syriza party platform is based on the notion of writing off Greek debt and ending five years of economic austerity, European leaders and economic analysts don’t see either happening any time soon. Greece owes roughly $270 billion to its lenders, which include the European Union, European Central Bank (ECB) and International Monetary Fund, known collectively as the troika, which required strict economic austerity measures as a condition of the loans. While Tsipras has publicly said that the deal would soon be a “thing of the past,” getting out of it is easier said than done.
“The new Greek government will want to take a tough stance with the troika but has, in reality, very little bargaining power and can expect little sympathy from the rest of Europe,” David Kelly, chief global strategist at J.P. Morgan Funds, wrote in a Monday note.
Soon after Tsipras was sworn in, economic and political leaders from around Europe quickly weighed in to shut down any fears that new leadership means debts will be forgiven. “Mr. Tsipras must pay. Those are the rules of the game,” Benoît Coeuré, an executive board member of the ECB, told French radio station Europe1. And Jeroen Dijsselbloem, head of the eurozone finance ministers’ group, told reporters on Monday that “there is very little support for a write-off in Europe” and warned that Greece must “stick to the rules.” A spokesperson for German Chancellor Angela Merkel said in Berlin on Monday that “we believe Greece has accepted terms that are not off the table after the election day,”according to the Wall Street Journal.
The election came just days after the ECB announced a quantitative easing (QE) plan to spend 60 billion euros ($69 billion) a month buying back private debt and government bonds, in an effort to stimulate the eurozone’s sagging economy. The strategy is also known as .
“Political and financial markets have so far not responded negatively, as the large QE program that the ECB announced last Thursday has largely eliminated the contagion effect on other countries,” said Bert Colijn, a senior economist for Europe at the Conference Board, a research group with offices in New York and Brussels.
While the Athens stock market was down 3.2 percent following the news and the euro initially took a dip against the dollar, it quickly recovered to hit $1.13 on Monday, while other European markets in Germany, France and Spain all ended the trading day on a high note.
But the European economy isn’t out of the woods yet. Over the next few weeks and months, new Greek leadership will be negotiating with its creditors, possibly about new repayment terms, which could take a while.
“Probably the most difficult area of the discussions might be around structural reforms, as the troika sees structural reforms as the key precondition to lift economic growth in Greece, while Syriza is aiming to reverse many of these measures, based on its pre-election manifesto,” UBS analysts wrote in a note Monday morning. “We are uncertain whether the talks could be concluded by the end-February review deadline and, similarly, whether the eurogroup would be willing to extend the deadline and for how long,” they wrote.
Most expect, however, that leadership will be able to reach some kind of compromise. “In our view, it is likely that an agreement will eventually be found due to the strong mutual incentives of the Greek government and its eurozone creditors to avoid the worst-case scenarios of Greek government default or Grexit,” Citi research analyst Ebrahim Rahbari said in a note Monday. “But an agreement requires significant concessions by both sides, so the negotiations will likely be lengthy and could fail.”
Despite the new party’s anti-austerity sentiment, the risk of Greece really leaving the euro is small, especially since recent polls show that 76 percent of Greek citizens said they hoped to stay with the single currency “at all costs.”