The Greek election results were in line with expectations: New Democracy (ND) came first and would need to form a coalition with Pasok (which came third, as expected) to form a government. The Portugal-Holland game was more interesting, in our view.
What is a little surprising is that Pasok is saying it thinks the left-wing Syriza should be involved in coalition discussions, with hints that Pasok may only support a minority ND government, or that ND leader Antonis Samaras should not be prime minister (other news articles in recent days also suggest that the ND old guard do not like Samaras either and also think he should not be prime minister, as they see him as too right-wing).
All of this suggests that the next few days may not be straightforward. We can hope that EU pressure will get Pasok to change its mind, but we have to consider the possibility that Samaras cannot form a government with his three-day mandate, then we worry that first Syriza, then finally Pasok would get a go, and if that failed the president would have to try and organise something. The odds are that ND will form a government this week, but there are risks.
Next, ND has to argue with eurozone governments about easing austerity. Eurozone leaders will not trust Samaras, we think, because he was always reluctant to support reforms during the technocratic premiership of Lucas Papademos. Nonetheless, after some days/weeks, a deal is likely. In the meantime, we should not be surprised by some negative headlines, as each side tries to pressure the other.
The election avoided a worst-case surprise. It appears that EU pressure worked, but it does not warrant great optimism, in our view.
France's Socialists won in the French parliamentary election. We cannot be sure if French President Francois Hollande can now compromise more with German Chancellor Angela Merkel (yields had risen nearly 50% this month in France) or whether he will feel stronger in trying to force Merkel to change. Germany's opposition centre-left party is now saying it also supports a growth aspect to reforms. Since Germany's IFO survey turned sharply weaker last month, a pro-growth 2013 German budget makes sense. There is no sign of it yet, but it may be the positive surprise of the second half of 2012.
Market reaction may well be muted. Attention is likely to be on the Greek news of course in coming days, but may also focus on Spain and perhaps Italy too.
Conclusion: the election result was expected and avoids disappointment, but a rally will be tough until the market sees a Greek government in place and a deal with the eurozone.