Greece to remain in the euro - for now

18 June 2012

It didn't take long for the FTSE 100's (UKX) initial relief at the results of the Greek elections to give way to scepticism regarding the size of the challenges ahead for Greece and Europe.

The weekend's election saw the pro-bail-out New Democracy party edge just ahead of its anti-bail-out Syriza rival, meaning that, at least for the moment, Greece is no longer headed straight for an exit from the eurozone.

"However, this isn't the beginning of the end for Greece, in fact it probably isn't even (to paraphrase Churchill) the end of the beginning," warned Chris Beauchamp, market analyst at IG Index.

He pointed out that while New Democracy would now try to patch together a ruling coalition, any government would be "shaky at best". Additionally, while the Germans hinted at an extension of deadlines for Greek austerity efforts, they have stuck to their guns on the severity of the measures needed.


Jeremy Batstone-Carr, analyst at Charles Stanley, noted that horse trading may still be required before a working government can be formed, but acknowledged that the markets initially cheered the least-worst result.

"Although the financial markets will be relieved that Syriza did not emerge the most successful party, which would likely have stymied all attempts to form a government, putting the forthcoming €23.5 billion (£18.9 billion) 'Troika' disbursement at risk, Pasok leader [Evangelos] Venizelos has indicated that he would like Syriza to be involved in a government of 'national unity'," commented Batstone-Carr.

Spain and Italy remain volatile

In Spain and Italy, the two eurozone countries said to be most at risk of needing international bail-outs in the future, bond yields remained volatile.

The yield on Spanish 10-year bonds initially fell as low as 6.767%, before rising to 7.061%. Italy's 10-year bond yield also rose, up to 6.08% after earlier falling to 5.847%.

Looking ahead to the G20 meeting

All eyes will thus be on the G20 meeting to be held in Los Cabos, Mexico, on Monday and Tuesday.

"The escalation in the eurozone debt crisis is likely to take centre stage at this summit but investors should be wary of expecting too much from the meeting," warned Batstone-Carr.

While Mexican President Felipe Calderon has been vocal about a possible increase in the International Monetary Fund's (IMF) general agreement to borrow above the $430 billion (£275 billion) agreed at the IMF meeting in Washington, the US has continuously argued that the eurozone remains a sufficiently wealthy region to take care of itself.

UK's emergency measures - friend or foe?

Batstone-Carr suggests that the G20 should take the UK's unilateral approach and encourage individual countries to shore up their own banking systems.

On 14 June, the Bank of England announced emergency measures to protect its still-vulnerable banks. Despite Royal Bank of Scotland and Lloyds Banking Group already being under state ownership, the Bank of England confirmed that it would make additional liquidity facilities available to protect banks from the risk of deposit runs which might arise as a consequence of events in the eurozone "in the coming weeks", according to governor Mervyn King.

Although these measures were greeted positively by the financial markets, Batstone-Carr remained sceptical.

If no multilateral measures to prevent a global financial disaster can be achieved and, as capital controls to restrict cross-border flows become more widespread, countries may be forced to adopt the 'every man for himself' approach of the UK.

However, Batstone-Carr noted: "It hardly needs pointing out that many countries are unlikely to be able to follow the UK's lead including not just Spain and Italy but perhaps the Benelux countries and maybe France too. Therefore we view the UK's approach as hardly supportive to the eurozone or other global financial entities."

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