Monday 25 September 2017

Euro falls to three-month low over alarm on developing Greek crisis

Donal O'Donovan

Donal O'Donovan

The euro plunged to a three- month low against the dollar and the Greek stock market plunged as markets digested the weekend elections in France and Greece yesterday.

The voter backlash against austerity in Greece and France initially shook Asian and European markets.

Asian exchanges closed down early in the day, and shares on the major European stock exchanges yo-yoed in volatile trading yesterday.

The biggest action was in the currency markets, where the euro plunged in early trading.

The euro fell to a three-month low of US$1.2955 in early trading yesterday before recovering somewhat to trade at around $1.3050. Most European stocks recovered late in the session, but not Athens, which ended the session down 6.67pc.

Greek government debt was also battered in the markets. The 'yield' or interest on Greek government bonds was up 2pc to 21.86pc, compared with 6.06pc for Ireland.

In contrast, France's cost of borrowing actually fell in the markets following the election of its new Socialist President.

The contrast highlights the extent to which it is the political situation in Greece that investors see as the cockpit of eurozone instability.

The latest elections in Greece returned no clear winner and included big gains for parties that want the country to exit the single currency.

It means summer 2012 is set for a full re-run of the euro crisis with the potential for Greece to leave or be forced out of the currency union now higher than it was before the second Greek bailout.

Election

In Athens, horse trading to form a new coalition government was under way last night but the election may end in a 'hung parliament' and repeat elections that could be held as early as June 10.

That is just days before the country is due to sign off on €11.5bn of new cuts to access EU and IMF rescue loans.

If the cuts are not agreed, there is a real risk that loans will be held back -- that would spark a Greek collapse into a messy national bankruptcy -- with the country ultimately forced out of the single currency. Yesterday, Willem Buiter, chief economist at US bank Citi, said there was now a 50pc to 75pc chance of Greece leaving the euro over the next 18 months.

In February, he had put the risk at 50pc, and last year reckoned there was just a 30pc risk of a euro exit.

There is no exit mechanism for any country to leave the currency, so an exit will be by definition chaotic.

Investors have shifted cash away from economies hit with the biggest spending cuts as the crisis has developed -- many in favour of the less disciplined but growth-oriented US.

Influential market commentators have also long said that austerity alone would not halt the crisis.

The risks were shrugged off across much of Europe by the close of trading. London and Dublin were closed, but stock markets in France, Germany, Spain and Italy all ended up.

Irish Independent

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