LONDON, Jan 26 (IFR) - Syriza's choice of another anti-austerity party as coalition partner sparked a sell-off in Greek bonds on Monday after a relatively stable start to the day for the country's debt.
Greece's 10-year bonds opened the day bid at 8.67%, according to Tradeweb, inside Friday's highs of 9.48%, after anti-austerity party Syriza won 149 seats in Sunday's parliamentary elections, falling just two seats short of an absolute majority.
But after Syriza agreed in principle to form a coalition with the Independent Greeks, bonds widened to 9.14% by 1621 GMT. Investors are concerned that a compromise between Greece's troika of creditors - the European Commission, the ECB and the IMF - and the new government will be difficult to find.
"They are even more aggressively against the troika than Syriza, if anything, and bond yields widened on the news. We will just have to wait and see what sort of policies emerge in the days to come," said Darren Ruane, head of fixed interest at Investec Asset Management.
The Independent Greeks are relative unknowns to the investment community - the party was formed in 2012 in the wake of the first Greek debt crisis - and this has left the market uncertain.
"The only we seem to know about the Independent Greeks is that their focus is on the social policy side of things, and they adhere very strongly to the view that the austerity measures are to blame for Greece's economic problems," said Alan Wilde, head of global fixed income at Baring Asset Management.
One of the main questions for the market is how all of this will affect ongoing bailout negotiations ahead of a February 28 deadline.
One of Syriza's key promises was to force the troika to soften terms on a bailout package and perhaps even force a haircut.
"That's the red line. As long as we are talking in terms of financial engineering I think there's some goodwill and understanding from the Europeans, apart from maybe the Finns. Once we start talking about haircuts, that's when the markets will start worrying again," said Gilles Moec, head of developed Europe economics at Bank of America Merrill Lynch.
The other question is whether there will be any contagion to other parts of peripheral Europe. As of now, there has been no sign of it and the market is viewing the elections as a purely Greek event, as it has for a few weeks now.
Last week's QE announcement from the ECB is curbing potential volatility. Italy's 2.5% December 2024s, for example, were 3bp tighter on the day to a bid yield of 1.48% at 1622 GMT, according to Tradeweb.
However, there could be some effect down the line if other anti-establishment parties take their cue from Syriza.
"This result could have an important influence on politics in other countries. In Spain, for example, the anti-austerity party Podemos could potentially benefit by having more of a platform," said an analyst. (Reporting By Abhinav Ramnarayan, Editing by Helene Durand and Julian Baker)
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