Risk currencies opened lower in Asian session trade as concerns over possible exit of Greece intensified over the weekend. Greek politicians were unable to reach a deal to form a workable coalition government with far left leader Alexis Tsiparas of the Syriza party pulling out of the talks over the critical issue of adherence to the bailout agreement. Mr. Tsiparas stated that "As long as they insist on the bailout, to a policy that the people have rejected, they cannot ensure social stability."
Meanwhile in Germany, the weekly Der Spiegel reported over the weekend that a task force in the German Finance Ministry has been assessing the consequences of a Greek euro exit for nearly a year. According to the magazine, the task force recommends that Greece should continue to receive money from the European rescue funds even after leaving the Eurozone but only in order to service the bonds held by the ECB rather than use for operational funds. The news will no doubt only inflame the debate allowing Mr. Tsiparas to argue that European rescue efforts are designed only to rescue investors rather than help Greek citizens to recover from teh country’s economic depression.
On the other hand German finance Minister Wolfgang Schaeuble said Germany would be willing to support further growth measures for Greece. Der Spiegel reported that German Chancellor Angela Merkel is now willing to give in to the demand of the newly elected French President Francois Hollande to add a growth component to the EU fiscal compact. Merkel and Hollande are scheduled to meet Tuesday in Berlin to discuss policy issues further.
With Greek political situation remaining unresolved two issues are becoming clearer. Greece will most likely have to have another set of elections and the anti-bailout forces of Mr.Tsiparas may gain more power. Secondly the EU fiscal authorities will have to abandon their demands for draconian austerity measures in Greece and will have to seriously consider the prospect of debt forgiveness if they want the country to remain in the monetary union.
The EUR/USD fell through the key 1.29000 support level and Aussie broke parity for the first time this year time as risk aversion flows accelerated into the European open. Still the price action remained cautious rather than panicky as investors awaited to see how events develop in Greece. With no meaningful economic data on the calendar in both Europe and North America trading in FX is likely to take its cue from equities for the rest of the day.