There was some excitement in the capital markets overnight, when what was initially seen as an outright victory for Syriza, giving it an absolute, 151-seat majority in parliament - a fear that briefly pushed the EURUSD under 1.11 when the Euro PPT stepped in - ended up being a placing just shy of a majority with 149 seats. However, that same excitement fizzled several hours ago when the "radical left" party agreed to form a government with the "rightwing" group of the Independent Greeks in the aftermath of Syriza's historic win which harnessed the public backlash against years of belt-tightening, job losses and hardship.
As the FT reports, Panos Kammenos, leader of the fiercely anti-bailout Independent Greeks, said as he left Syriza’s headquarters after a meeting with Alexis Tsipras, the prime minister-elect: “The country has a government. Independent Greeks will give a vote of confidence to Alexis Tsipras.” The deal would give Syriza a comfortable working majority in parliament but Mr Tsipras has yet to confirm anything as he continued coalition negotiations with other parties.
So in a parliament in which the nationalist Golden Dawn placed third, the new leadership will be comprised of a far left and a far right group, both united by the hatred of European bailouts and the stifling Greek economy, both of which they are eager to blame on Germany and the Troika.
Despite their ideological differences, the two leaders established regular contacts while the previous centre-right New Democracy government was in office, based on their shared stance that Greece should abandon austerity and seek a debt write-off, while remaining a member of the eurozone.
Mr Kammenos, a former deputy merchant marine minister in a New Democracy government, left the party in 2012 to set up his own party, taking a handful of lawmakers with him.
This means that any potential agreement with the next party Tsipras is looking to work alongside, the new To Potami party, becomes of secondary importance:
Mr Tsipras was meeting Stavros Theodorakis, leader of the centre-left To Potami (The River) party later in the day to discuss possible co-operation. Mr Theodorakis has refused to participate in a Syriza-led government but could offer support even if his party is not part of a formal coalition. To Potami finished fourth in the election with 6.4 per cent of the vote and 17 seats.
And while bankers across Europe were fast to talk down the possibility of a hardline Syriza, having failed to get those two elusive seats, the fact that it has aligned itself with a just as rabid anti-Europe party will actually end up forcing Tsipras hand to deliver on at least some of his anti-bailout, anti-Troika, promises, all of which Germany has shot down apriori.
So what happens next?
Well, on one hand, as RBS' Greg Gibbs points out, the ECB's just announced QE "substantially" increases the incentive for Greece to stay in an acceptable EU/IMF austerity program as a decline in EUR and regional bond yields provide a draw for the country. He adds to expect a lot of “bluff and bluster” from both sides of the Greek debate in 1H2015 especially since EU members will concede little ground to Syriza-led Greek government. The problem is that Syriza can hardly agree to no concessions as it has built reputation on easing austerity.
This leads Gibbs to conclude that the most likely outcome is just enough ground conceded on both sides to save face.
Immediate focus likely to be troika review expected end-March; most important deadlines expected when Greece faces repayment pressure on large amount of bonds in July/Aug.
The take of Morgan Stanley's Hans Redeker is less optimistic: he, alongside other fx strategists, thinks that the Greek election outcome don’t bode well for the Euro, adding overnight that investors will watch which party Syriza reaches out to. We now know that said party is the a rightwing anti-bailout organization, which weaknes the compromise angle.
MS says to expect a modest core European opposition against Greek debt restructuring as no doubt current debt levels are unsustainable.
Friction with EU partners will probably be on reforms as Syriza has not only called for the end to austerity, but wants to roll back some structural reforms and re-hire in public sector.
The conclusion: it will be up to the German government to "make a difficult decision."
So what was Germany's kneejerk take? Well as Michael Grosse-Broemer, chief whip of German Chancellor Angela Merkel’s party, said in a N-TV television interview, Alexis Tsipras will have to face reality “once the smoke of the election campaign lifts" adding that "you have to abide by agreements that were made in the past. Tsipras has promised a lot, but he will have to deliver if Greece wants aid disbursements to continue." It is not quite bailoutmail but if the word fits.
Merkel's lawmaker concludes that the Greek left is “a bit blinded by their ideology,” and that the German-led approach has worked in other euro-area countries that received bailouts.
It almost makes one wonder if it wasn't "austerity" as much as corruption and incompetence that is behind the endless Greek drama...
In any event, both sides are now on collision course, with Tsipras knowing full well that if he dilutes his promises sufficiently his political career will also be measured in months. Speaking of Tsipras, here are some amusing snippets about his ideological position from the Guardian:
As Greece descended into economic crisis, there were almost no signs that the young ideologue, an ardent admirer of Ernesto “Che” Guevara – he named the youngest of his two sons after the Argentinian Marxist revolutionary – would emerge as the wild card to challenge Europe or Athens’ own dynastic politics and vested interests.
Tsipras, perhaps more than any other Greek politician, has flourished on the back of crisis, his anti-austerity rhetoric and dexterity as a political operator becoming sharper by the day. His determination to learn English – swotting from textbooks in his spare time – helped turn him into a polished performer and earned grudging respect from his greatest opponents.
“Although trapped in his own rhetoric, he is very good at deflecting criticism and often using it to his advantage,” says Dr Eleni Panagiotarea, a research fellow at Greece’s leading thinktank, Eliamep. “His electoral campaign has been slick and very media-savvy.”
At 40, the former communist party youth activist, student leader, self-avowed atheist and firebrand appears determined to jolt not only his own country but also Europe. Nonconformity is part of the package. Others, say aides, will have to wake up to the reality that the radicals – for they wish to be called nothing else – will be doing things differently.
Under Syriza, Athens will challenge fundamentals: the politics of austerity, fiscal policies, how business is done. With the eyes of the world media on him, Tsipras rammed home that message himself on Sunday after casting his vote in Athens.
"Our common future in Europe is not austerity, it is the future of democracy, solidarity and cooperation," he announced.
Greek politicians are unaccustomed to taking Europe by storm. And they are certainly not used to being seen as trailblazers capable of galvanising public opinion in the 28-nation bloc.
But, mixing chutzpah and charisma, Tsipras has managed to do both. From political unknown he has become the gadfly tormenting the big players in the EU.
"Merkelism,” he says, is in his sights. It is hard to overestimate the significance of this outcome for the left. Or Tsipras’s role in uniting groups that, famously, have remained fractured on the edge of political spectrum.
Deploying unrivalled communication skills, the telegenic Tsipras has allowed Syriza to speak for a whole sector of society that for decades was hounded and harassed by authoritarian rightwing rule.
In a nation still polarised by the fault lines of a bloody left-right civil war, both he and his alliance of Euro-communists, socialists, Maoists, Trotskyists and greens – since united into a single force – were only three years ago firmly relegated to the sidelines of Greek politics.
Outside the eclectic world of Syriza committee meetings, congresses and conventions, they were not a force to be reckoned with.
Maybe they are, but Europe is well-aware that any Greek renegotiation means one thing: an impairment of the ECB balance sheet, something which is also a non-starter for the central bank which is already toying dangerously close with losing all credibility as well as big losses for German taxpayers now that the bulk of Greek debt exposure has been mutualized outside of the banking sector,
Whatever happens, expect a substantial increase in volatility in coming weeks as Greek pre-election promises and the harsh European reality finally collide, and lots and lots of red flashing headlines and FX kneejerk responses.