Greece's new anti-austerity government worries markets

Greeks hope left-wing Syriza party brings change
Greeks hope left-wing Syriza party brings change

Greek stocks and government bonds fell, and the euro dipped, after the anti-austerity party Syriza swept to victory in national elections, setting the stage for a clash with its international lenders.

The euro hovered around $1.12 against the dollar, after earlier falling near the 11-year low reached last week after the European Central Bank announced a massive stimulus program. Greek stocks dropped more than 3% in early trading, while the country's banks were harder hit. Yields on Greek 10-year government bonds rose to 8.7%.

Syriza's victory was fueled by populist anger over severe austerity measures that critics felt prioritized payments to creditors over an economic rebound in Greece.

Greece accepted its first bailout in 2010. Since then it has received €240 billion ($277.8 billion) in emergency loans from the European Union and International Monetary Fund to rescue its battered economy. In return, the country agreed to deep cuts in government salaries, tax hikes, a freeze on state pensions and bans on early retirement.

Five years on, the broad economic picture is improving. But life for many Greeks is much worse. Unemployment has soared and wages have fallen even as people are working longer -- all of which fueled demand for change.

Alexis Tsipras, the Syriza leader who will be the next prime minister, has pledged to roll back austerity measures. He will govern in coalition with the Independent Greeks, a small party that also opposes the tough bailout terms.

Analysts say his choice of coalition partner raises the likelihood of a major clash with Greece's international lenders, and the risk of an eventual exit from the eurozone -- the Grexit scenario.

Related: Greece elections: Have 5 years of austerity paid off?

On the campaign trail, Tsipras said he would cut taxes and force Germany and other creditors back to the bargaining table to renegotiate the terms of the bailout package. He said restructuring the debt would allow the Greek government to increase spending and boost the economy.

European leaders oppose this plan, and still maintain tremendous leverage over Greece. Athens needs an infusion of cash to make an upcoming bond payment, and the country's banks need access to cheap financing from Europe's central bank.

"The vote is a mandate for renegotiation on debt and a plea for an end to austerity," wrote Kit Juckes, at Societe Generale. "With Mr Tsipras sounding so belligerent, markets will ponder what a 'Grexit' would do for European assets (unambiguously bad for the euro) and what concessions on Greek debt would do to other highly indebted economies."

Slideshow: Greek elections: Faces of austerity

Meanwhile, Greece's debt continues to grow. Net debt was around 130% of GDP in 2010 according to the IMF -- now it's close to 170%. The economy has shrunk, so the debt ratio has increased, meaning it's only getting harder for Greece to rid itself of debt -- it may be nearly impossible.

Read next: 2015: The global economy's 'sink or swim' moment

-- Mark Thompson and Virginia Harrison in London contributed to this article.

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