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More Money-Printing to Come After Greek Election?

Having seen its influence on global markets ebb in recent months Greece now finds itself at the eye of the storm again, following an inconclusive election result that saw voters reject austerity and the terms of its bailout from the European Union and International Monetary Fund.

The Parthenon, illuminated at night, sits at the top of Acropolis hill in Athens, Greece, on Monday, Feb. 13, 2012.
Bloomberg
The Parthenon, illuminated at night, sits at the top of Acropolis hill in Athens, Greece, on Monday, Feb. 13, 2012.

With hardline parties from the left and right making big gains in Sunday’s election, it is now highly likely that the formation of any Greek coalition government will involve a renegotiation of terms for Greece.

Stocks fell sharply on the news in Asian trade, and European stocks are expected to follow suit at the open, as analysts rushed to predict renewed market volatility and political uncertainty.

“Austerity loses all the way around. Europe’s elected politicians fail when they try to impose austerity by cutting deficits or lessening social payments,” said David Kotok, the CIO of Cumberland Advisors in a research note.

“Greek membership of the euro zone is now at risk with serious contagion risks for the rest of the periphery ,” Nouriel Roubini, the founder of Roubini Global Economics, tweeted following the results.

The “result of Greek elections is much more serious than the French one as the former leads to chaos while Hollandewill turn out to be a moderate,” added Roubini.

The big winner in Greece’s electionwas the hard left Syriza, led by Alexis Tsipras. Winning 51 or the 300 seats in Greece’s parliament, Tsipras will be crucial to attempts to form a government, but believes he has a mandate to “cancel the memorandum of barbarity,” that is the EU/IMF bailout.

“This is the crisis we have all feared,” said Carl Weinberg, the chief economist at High Frequency Economics following the vote. “A rejectionist government will force the IMF and EU to suspend maintenance payments for Greece. A hard shutdown of the government and total default of all bonds will ensue, striking at the balance sheet of even the mighty [European Central Bank ].”

The market will now be watching the ECB very closely for any indication that it is ready to act to shore up confidence. “With austerity diminished, there will be more pressure for the ECB to print. The ECB is a composite of weights of the 17 members. Political momentum moves toward more monetary ease. We expect another LTRO”—Long Term Refinancing Operation, a capital-injecting it has used in the past—“or some other form of balance sheet expansion before the end of this year,” said Kotok from Cumberland Advisors.

Jim O’Neil, the chairman of Goldman Sachs Asset Management, said the change in European sentiment could be a market positive as investors and politicians face up to new risks.

“If the Greek results reintroduce additional risks and fears of financial contagion across weaker euro zone countries, then this might also presumably weaken the euro because of the perception that it may force the ECB to be more accommodative,” said O’Neil in a report in which he joked that the U.S. Federal Reserve may quicker to act than the ECB.

“It would be ironic, if not improbable, that a major escalation of Euro area financial contagion influenced the Fed more than the ECB,” said O’Neil

Contact Europe: Economy

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