Greek election market rally runs out of steam

Julia Kollewe & Nick Fletcher – Guardian.co.uk June 18, 2012

The relief rally on world stock markets following news that pro-bailout parties in Greece had secured a narrow victory in the weekend’s election re-run has quickly run out of steam.

Spanish bond yields jumped back above 7% – a borrowing level widely seen as unsustainable – as attention turned to the financial problems of the other weaker members of the eurozone ahead of a G20 meeting in Mexico. There were also renewed concerns that despite the election result, debt-laden Greece was still in danger of being ultimately forced out of the single currency.

“The challenges facing the Greek economy remain mountainous and the general feeling remains predominantly that the day of reckoning has merely been delayed,” said Michael Hewson, senior market analyst at CMC Markets UK.

“The outcome of the Greece election could prove to be one of those results that could end up being potentially toxic to the winner, given that the next government could well preside over Greece’s eventual exit from the euro.”

The euro hit a one-month high against the dollar, rising to $1.2748, before slipping back, as did European stock markets. The FTSE 100 initially leapt around 80 points to 5555, but soon slumped back into negative territory, down 13.04 points at 5465.77. Spain’s Ibex is now down 1.47%, while Italy’s FTSE MIB is off a similar amount. Germany’s Dax has managed to hold onto some of its gains, up 0.75% while France’s Cac is up 0.58%, although both are below their best levels of the morning.

In Asia, Japan’s Nikkei closed 1.8% higher while Hong Kong’s Hang Seng and Singapore’s Straits Times both added about 1%. The leaders of Spain and Italy welcomed the election result.

Arriving for the G20 summit in Mexico, Italian prime minister Mario Monti said: “This allows us to have a more serene vision for the future of the European Union and for the eurozone,” he told reporters.

“We hope that a strong government can be formed which confirms the commitments made with the EU.”

Spanish prime minister Mariano Rajoy hailed the result as “good news for Greece, very good news for the European Union, for the euro and also for Spain”.

“The [Greek election] results appear close to what the markets had been expecting,” said analysts at Barclays Capital. “The fact that the centre-right New Democracy has won the most votes will be viewed as market friendly because it reduces the likelihood of a near-term Greek exit from the euro area, and will be viewed as making successful negotiations with the troika somewhat more likely.

“Already on Sunday night euro area officials and the IMF have expressed their willingness to look at adjusting some elements of the programme, in particular its timing. Overall, however, we expect the effect on the euro and risky currencies and assets to be muted.”

On Sunday night the Eurogroup of finance ministers said it looked forward to the swift formation of a new government and reiterated its commitment “to assist Greece in its adjustment effort in order to address the many challenges the economy is facing.”

It acknowledged the “considerable efforts” already made by the Greek citizens and said it remained convinced that continued fiscal and structural reforms are Greece’s best guarantee to overcome the current economic and social challenges.

“The Eurogroup expects the Troika institutions to return to Athens as soon as a new government is in place to exchange views with the new government on the way forward and prepare the first review under the second adjustment programme.

European leaders had postponed their departure for a two-day G20 summit in Mexico in order to be able to digest the outcome of the ballot in Greece, which posed the most severe challenge to the EU and the euro.

The fallout from the Greek election and the broader issue of how to avert a renewed European banking crisis and stabilise the currency will dominate the Mexico negotiations, with the US and the UK pressing the leaders of Germany, France, Italy and Spain to ward off the risk of collapse by coming up with persuasive action by the end of the month.

The G20 talks will be promptly followed by a flurry of EU summitry climaxing in a European Council of heads of government in Brussels at the end of next week.

“European leaders are expected to come under increasing pressure to deal more decisively with the financial crisis as many nations outside Europe like China and the US are being negatively impacted ever more by the ongoing turmoil in financial markets,” said Mark Huber at ETX Capital.

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