Greek markets are rallying strongly on rising hopes that pro-bailout forces will be able to put together a coalition after Sunday’s election.
While this is the most bullish scenario for the euro in the near-term it is by no means the end of the crisis. Even the pro-bailout forces want to renegotiate the EU/IMF bailout in an effort to revive economic growth. No matter who gets into office, Greece will remain a ward of the EU and IMF for years to come, which will keep social unrest at a high ebb.
Each of the other two scenarios are euro negatives. Another inconclusive election would be a disaster while a Syriza-led government would likely be less bombastic than electoral rhetoric would suggest, it would still be a euro-negative.
With the market heavily short of EUR/USD, the risk is for a win by the pro-bailout forces to squeeze the market. But given the tepid response to the Spanish bailout, Mr. Market seems to be very comfortable carrying a big short position. We may need to see a move above 1.2750/1.2800 to really scare the pants off the big boys…
