Syriza capitulates: market implications

by George Hatjoullis

The markets have responded well to the Syriza capitulation and it is to the capitulation that they are responding. The capitulation has demonstrated that even the most belligerent of EZ governments does not actually wish to leave the EZ. It may huff and puff and posture but when push comes to shove it will back down and fall into line. It may not be possible to reach a deal on Sunday. It may be that Greece must take an alternative path. The key, from a market perspective, is that Greece co-operate with Brussels in determining this path. The institutions of the EZ have demonstrated that they are in control. Other left leaning governments (or right leaning for that matter) that want to challenge the sovereignty of the EZ over its members will think twice. This was never about democracy. It was always about sovereignty. The institutions of the EZ are in control and the markets like this.

The institutions of the EZ are the soulless minions of fiscal orthodoxy to which I refer in an earlier blog. The Euro zone crisis has shaped the future of the EZ. It is a response to the potential moral hazard intrinsic to currency areas. It is not a necessary response. Nor is it desirable. However, it is a response that markets like and the markets have been central to everything that has happened to shape the EZ. It is after all about access to sovereign bond markets. If Greece could persuade the private sector to lend to it at suitable interest rates it would not be in this mess. The real power rests in these bond markets. Bond markets like fiscal orthodoxy and what they want is what they get.

Equity markets are less concerned which fiscal regime dominates. They only need to know what it is and that it is stable and they can get back to business, which is to drift higher in price. The risk that the institutions were not in control of Greece, and the uncertainty that this generated, unsettled equity markets. It is summer and they unsettle easily in the summer. The capitulation of Syriza and the demonstration that the institutions are in control and will do nothing to upset sovereign bond markets, has restored calm. This is what the rally of today and yesterday is about. It also helps that the Chinese authorities may be getting to grips with their own market casino. The key to further gains next week is not in the specific deal reached but that whatever is agreed, Greece is compliant. 

You may conclude that this blog is facetious. It is not intended to be.