Greek political turmoil haunts markets

AP News
Posted: May 09, 2012 6:04 AM
Greek political turmoil haunts markets

The political turmoil in Greece after inconclusive elections weighed on markets once again Wednesday with investors increasingly concerned that the country may be forced out of the euro within months.

Following Sunday's election, in which Greece's main parties were punished for supporting the bailout, there are doubts that a government can be formed. After the conservative New Democracy failed to muster enough support to form a government, the mandate has passed onto Syriza, a left-wing party that came a shock second in the election.

Its leader Alexis Tsipras said Tuesday that Greece was no longer bound by its promises to cut spending sharply. But a failure to keep those promises could see international lenders to cut off rescue funding. That would likely lead Greece to default _ and to the exit door of the euro common currency.

Tsipras is not expected to be able to form a government and most observers think a second election will be called for next month.

The uncertainty surrounding Greece has hurt sentiment all week, particularly on Tuesday when stocks took a battering after Tsipras' defiant stance on the bailout agreement.

"Political uncertainty is never good for markets, and we have it in copious amounts at present," said Yusuf Heusen, a sales trader at IG Index.

In Europe, the FTSE 100 index of leading British shares was down 0.3 percent at 5,535 while the CAC-40 in France fell 0.4 percent to 3,112. Germany's DAX bucked the trend, trading 0.1 percent higher at 6.450.

Wall Street was poised for a retreat at the open with both Dow futures and the S&P 500 futures down 0.5 percent.

The euro has also been under selling pressure all week and was trading near four-month lows against the dollar, down 0.2 percent Wednesday at $1.2970.

Fears that the Greek political situation will become increasingly unstable has raised fears over how Europe's debt crisis will play out over the months ahead. The market pressure on Spain and Italy has intensified, with their government borrowing rates rising again. The yield on the ten-year Spanish bond was up 0.20 percentage points at 5.98 percent while Italy's rose 0.15 percentage points to 5.51 percent.

Those rates are considered manageable, for now, but it wouldn't take much of an increase for them to be considered unsustainable in the long-run. The problem for Europe is that the cost of bailing out Spain, let alone Italy, may be too much.

"The worst case scenario for the EU is if Greece leaves the eurozone and undertakes a disorderly default," said Gary Jenkins, managing director of Swordfish Research. "It is difficult to see why the country would do this but then again it only takes one angry politician to change history. Whilst an unlikely scenario if it happened it could have huge ramifications for the rest of Europe."

Earlier stocks in Asia took a hit following Tuesday's declines elsewhere.

Japan's Nikkei 225 ended down 1.5 percent at 9,045.06, its lowest finish in nearly three months while Hong Kong's Hang Seng fell 0.8 percent to 20,330.64 and South Korea's Kospi lost 0.9 percent to 1,950.29.

Australia's S&P/ASX 200 slipped 0.9 percent to 4,275.10 after falling prices for metals hurt mining shares. Mainland Chinese shares also lost ground. The benchmark Shanghai Composite Index slid 1.7 percent to 2,408.59.

Oil prices remained under pressure amid the uncertainty with the benchmark New York rate down 67 cents at $96.34 a barrel.


Pamela Sampson in Bangkok contributed to this report.