Markets are reacting somewhat positively to the Greek elections. The Euro is performing well, hitting 1.2714 as I write. I think the move in the Euro and the muted reaction in U.S. stocks are both good signs that there is a nice base developing.
The key will be what Europe does next. We have seen Europe suffer the same fate as Sisyphus too long. They push the rock up the hill, only to find that it rolled back down the next day. Europe can do what they usually do, declare victory, delay implementation of ESM, avoid serious negotiations on the Greek bailout, and fail to implement any of the Spanish bailout. That is what they have done so often, and if they do it again here, we will see the rock rolling downhill, and this time it might not be able to stop it and push it back up.
On the other hand, with the rock so close to the top, Sisyphus or Merkel might ask what can be done? Can the rock be pushed over to the other side? Can it be smashed once and for all? This may be the opportunity to end their misery. Now is the time to unleash the “coordinated” bailouts. Launch new financing programs. Renegotiate the existing bailouts. Implement the FROB deal and create similar programs elsewhere. Cut rates. Create realistic growth and infrastructure plans. Cut unemployment benefits so working is more attractive that watching footy from your apartment for 2 years on 70% salary.
A lot can be done. I remain hopeful, if not convinced, that this time Europe won’t pause in their efforts at the first sign of success. That they won’t delay bank recaps just because bank share prices are up. That they won’t worry about bank runs, just because they slow to a trickle. Europe needs to continue acting. Whatever the long term result is, Europe can ease the pain by acting now and creating programs that offer a real chance of success, or orderly failure. Just like the Spanish bailout, if this is all we get, the market will struggle, but if Europe is willing to show a willingness to embrace change, make the bailouts workable, and provide incentives to growth, we might just see a bigger rally.
If Merkel is busy sipping mojitos claiming everyone else sucks, and Rajoy is out celebrating victory, while the Greeks fight amongst themselves, well that is the Europe we have grown to expect and a big sell-off will be justified.
For now I remain long and am not cutting into the initial pop in futures, as I don’t think we will see the sort of price action we saw last Monday.