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Greece’s Syriza Government Raises New Hopes for Debt Crisis Solution

Following the election of the left-wing Syriza party lead by Alexis Tsipras on February 1 2015, European leaders have cautiously welcomed the new Prime Minister’s proposal to deal with Greece’s debt crisis.

Greece’s Syriza Government Raises New Hopes for Debt Crisis Solution

In a meeting in Rome, the Italian Prime Minister Matteo Renzi assured Mr. Tsipras that Italy would help his country even though they do not agree on everything.

Yanis Varoufakis, Greece’s Finance Minister is said to have proposed a new deal that would see the country receiving comprehensive bailout for its massive debt. 

Mr. Tsipras’s party came to power with the promise to end austerity measures by writing off half of the country’s debt, a move that caused jitters among European Union officials and in the markets too. The new radical left-wing government is also adamant about not accepting any more loans from the IMF and EU.  The big question is how the country will finance itself against the background of massive sovereign debt, high unemployment, and slow economic growth.

Reports indicate that Mr. Varoufakis is cautious about writing off the debt and is instead looking for the debt to be swapped for bonds that Greece would repay if the economy performed well.  

Jean-Claude Juncker, the European Commission presidents asserted that the bloc would have to agree on several policies to help deal with the problems in Greece. Following his victory, Greece’s PM met Mr. Juncker as well as France’s president Francois Hollande who has been supporting a softer stance with Greece.

At the Rome meeting with the Italian Prime Minister, Mr. Tsipras urged the bloc to support economic growth and social cohesion above all other policies. Mr. Renzi supported him by equally urging European leaders to help Greece not through austerity measures but through investing in growth.

In spite of these promising initial remarks, there are still many hurdles to overcome, with many market observers concerned that Finance Minister Varoufakis is underestimating the problem.

 

Long way to go

Greece’s debt stands at €315bn or approximately 175% of the country’s GDP.

Angela Merkel, Germany’s Chancellor is vehemently opposed to debt cancellation, asserting that creditors have already made significant concessions pertaining to the outstanding debt.  Merkel says that she still wants Greece to remain in the Eurozone but she does not support a new wave of debt cancellation.

Mr. Varoufakis’s plan is to have in place a fiscal stimulus initiative by May 2015, with the condition that repayment will be made only if Greek is able to restore its economic growth.

The Finance Minister is keen on negotiating separately with major creditors, which include the IMF, European Central Bank and the European Commission. The three creditors offered a bailout worth €240bn to the previous government.

The previous government was kicked out following years of austerity measures that were imposed to manage the massive debt. Greeks elected the new radical left-wing party with the hopes that the new government will end austerity.

 

Market Impact

Following the news that there might be a deal to eliminate the debt crisis, European stocks rallied. Going forward, investors must have an eye on European stocks, especially the FTSEurofirst 300 index of the major European shares.

It is also worthwhile noting that although the new Syriza government is proposing an end to austerity, it is keen on protecting privately held bonds from losses.

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