Afternoon analysis 26.01.2015

The Syriza win is a consequence of ECB idleness after crisis. The zloty gained against the frank and other major currencies. Andrzej Bratkowski from the Monetary Policy Council sees room for 100 basis points cut.

The left-wing Syriza party will form a coalition with Independent Greeks party to build a new government in Athens. The outcome of Sundays elections turned around the Greek political landscape as New Democracy and PASOK were marginalized after four decades of holding the power in the country.

The result of Greek elections in the longer term will be one of major risk factors for financial markets.

The parties that will form a government are against austerity imposed by the European Union and International Monetary Fund in exchange for aid after crisis hit the country in late 2009. Both parties are willing to renegotiate debt payments – thus new government will probably seek to write down some of debt (the EU is willing to extend payments period). The Syriza promised also to create 300k jobs and raise minimal wage by 30 percent.

ECB idleness

Greeks turned to extreme parties due to idleness of the European Central Bank. After the crisis hit, the US Federal Reserve and the Bank of England introduced unorthodox measures – purchases of government bonds was pivotal – to revive growth and battle unemployment. The ECB held to standard policy measures that time.

The European monetary authorities decided to introduce measures that proved to be efficient in other countries on Thursday – three days before Greek elections. Recently, the unemployment rate in the US and in the UK dropped to pre-crisis levels and it stood at 11.5 percent in the euro zone – near its all time high of 12 percent. In Greece the unemployment rate is around 25 percent.

Greece is the very first and the largest victim of the public debt crisis. And now, the country is first to drop austerity measures. The uncertainty mounted, as the Syriza promises will be very difficult to fulfill in the euro zone framework, thus the specter of euro area dismantle is looming. Nevertheless, Syriza refrained from previously stated will to drop common currency.

The success of Syriza is a materialization of the European people reluctance to austerity. The saving measures introduced after crisis came resulted in a significant drop of GDP, what led to deterioration of the overall welfare. Although these measures were necessary, the ECB didn't facilitate the return to growth as seamlessly as the BOE or the Fed did. Currently, one can say that the ECB conservative approach was its biggest flaw after crisis, as it created additional risk for himself.

Zloty rose against frank

Andrzej Bratkowski from the Monetary Policy Council said that he sees a room for additional interest rates cut of 100 basis points. However, the easing should be 25 basis points a month as current volatile market environment is not supportive for one time cut. This would facilitate a battling of deflation and would support the GDP growth. The dovish comments didn't affect the zloty, as the Polish currency extended gains against all major currencies.

The frank was hit after the Swiss National Bank released figures that revealed 25 billion frank market interventions last week (a wide view on that matte in our morning commentary). The report showed that the SNB is not willing to let frank rise in spite of dropping EUR/CHF floor. As a result, there is new notion that the SNB may be less indulgent for currency appreciation as previously thought.

The impact of Greek elections is currently tamed as the new government is not completed and no actions were declared. That let the euro to rebound from its 11-years lows. This move was supported by the SNB interventions, what coupled resulted in higher risk appetite. Strengthened demand for risky assets resulted in a stronger zloty – the Polish currency rose against its major pairs. The most important is the CHF/PLN dropped – the currency touched 4.16 for a moment.