What Greek Election Results Mean for the Euro in 2015

Yesterday's (Sunday's) Greek election results have ushered in a new political era for Greece. One that will certainly impact the euro in 2015.

Greek election results yielded a victory for the far-left Syriza party. Syriza formed a coalition government with the Independent Greeks. And from there, the coalition government sent the far-left Alexis Tsipras to the Maximos Mansion in Athens as the new prime minister.

What greek election results mean for the euro
Syriza party leader Alexis Tsipras was sworn in as Greece’s Prime Minister today (Monday).

Syriza's rise began in in 2012. The Greek electorate was disillusioned. They were two years into a joint European Union-International Monetary Fund bailout program and just months removed from the announcement of a second bailout program.

In order for Greece to receive bailout money, it needed to get its fiscal house in order. But elevated unemployment met with austerity conditions that threatened social programs. It stirred up protests and social unrest. And Greek voters were staring down even more austerity measures as a condition of the bailout programs.

Syriza seized on this growing discontent. The far-left party promised to abandon budget cutting measures.

But such promises, if implemented, would have threatened to hold up bailout money. And this could have inevitably led to a Greek exit from the euro.

At the end of a summer 2012 election, Syriza didn't win a majority. And the New Democracy party kept a tenuous grasp at the head of the Greek government.

But the elections did severely weaken the socialist PASOK party, a fixture in Greek party politics, and the populist message remained strong.

So strong, in fact, that Syriza effectively overthrew the Greek status quo this weekend in parliamentary elections. Tsipras finally earned his seat as the head of the Hellenic Republic.

But all this does is breed more uncertainty in an already uncertain Eurozone...

What Greek Elections Mean for the Eurozone

You see, a big part of the Tsipras pledge was to restructure Greek debts that came from the two bailout programs.

The Greek bailout programs that Tsipras wants to renegotiate total 240 billion euros ($270.5 billion). About 182 billion euros ($205.2 billion) came from European member states, while the rest came from the IMF.

Greece will exit the bailout program at the end of February.

Tsipras seems to believe that creditors will accept a haircut on these loans. But that doesn't seem likely. Greece's biggest creditor is unmoving in seeing that bailout money paid out in full.

That creditor: Germany.

The bailout funds were built by a large wall of euros from capital of Eurozone members. Each Eurozone member paid up capital relative to the size of their economy.

Germany is the largest economy in the Eurozone. It is on the hook for about 27% of the loan guarantee commitments from the bailout funds.

If Tsipras gets the haircut he wants, Germany will suffer a big loss.

German Chancellor Angela Merkel has pushed back. Leaks to the press in the past month suggest that Merkel is becoming more receptive to a Greek exit. That is, if Tsipras tries to renegotiate the bailout terms to the detriment of Germany.

And this is where the Greek election results leave the Eurozone.

In 2012, the fears of a Greek exit were much more pronounced. Spain and Portugal were also taking bailout money. And Italy seemed not far off. Fears arose that should Greece exit the Eurozone, the rest of the periphery could follow suit. The contagion effect could force more members to exit the euro. And this would put a huge question mark on the stability of the single currency union.

Those fears have subsided a bit. The Eurozone periphery is still struggling, but for the most part they've been able to exit their bailout programs without much fuss. There's less of a chance that a Greek exit would spark a blossoming of Eurozone exits.

But at the same time, there's no telling what a Syriza victory could mean for the rest of the Eurozone just yet. The victory could very well embolden populist elements to emerge elsewhere and threaten a similar situation.

And the European Central Bank just played a new wild card last week...

How Eurozone QE Will Affect the Euro

The Eurozone's financial health all hinges on the success of the recently announced quantitative easing from the ECB. ECB President Mario Draghi has pledged that the new Eurozone QE program will entail a monthly purchase of 60 billion euros ($67.6 billion) in assorted assets to bring inflation to 2% (the most recent figures show inflation at negative 0.2%). About 50 billion euros ($56.4 billion) of that will be member countries' bonds. Greece will be precluded from the bond purchases, because the ECB already holds the maximum amount of Greek debt it can as dictated by thresholds established last week at the QE announcement.

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But with the possibility of a Greek exit following election results and the launching of an untested QE program, uncertainty will pervade the Eurozone landscape for a long while.

Here's how you can play this for profits.

The euro has been falling. It has fallen almost 20% since it topped out at $1.3934 last March. It's currently trading below $1.13, and while it may snapback on technical indicators, it's looking at a long-term march toward dollar parity.

The best way to profit? Short the euro.

And the best way to do that is by buying shares in the ProShares UltraShort Euro (NYSE Arca: EUO), a leveraged ETF that goes up in price if the euro falls in value relative to the U.S. dollar. Expect some snapbacks and some snags on the way down, but remember that there's not much reason to see strength in the euro for a while.

The Bottom Line: There's very little going on in the Eurozone right now to suggest that the muddled economic picture is going to clear up soon. Greek election results could threaten the future of the Eurozone. Eurozone QE doesn't look like the QE we're used to, and if it is successful it will only add to the depreciation of the euro. All these factors taken together make the euro short a viable long-term investment.


There's one big problem with Eurozone QE...it's not going to push down interest rates. That's what recent U.S. experience shows us. And who's going to want to buy Eurozone members' debt anyway with such low returns? If the ECB doesn't crowd out every other potential investor in the first place, that is. Eurozone QE is already shaping up to be a mess. The questions are numerous. Here's how to protect your money, so you don't get sucked in by the QE delusion...