Bankers braced for action with Greek poll result key to Eurozone crisis

By DOMINIC JEFF
Published on 17/06/2012 00:00

CENTRAL bankers are preparing to turn on the money taps to prevent an escalation of any crisis arising from today’s Greek election.

Investors are bracing themselves for a sharp fall in share prices if Greece’s anti-bailout parties win or a hung parliament leaves the nation leaderless. But some economists believe the event could prove a turning point in the euro drama if it forces leaders to take decisive action.

European Central Bank (ECB) president Mario Draghi broke cover on Friday, saying his bank was ready to step in and fund any viable Eurozone bank that gets in trouble as a result of a Greek default or euro exit. He also spoke of a deteriorating Eurozone economy with no inflation danger – hinting that monetary easing could be round the corner.

Bank of England governor Sir Mervyn King moved pre-emptively against the “black clouds” from the Eurozone last week with a new £100 billion credit-easing facility.

European politicians remain divided on how best to tackle the continent’s sovereign debt and banking problems, but pressure has been building for a policy shift towards more growth-friendly policies, with Germany looking increasingly isolated in the austerity camp.

Mike Lenhoff, chief strategist at Brewin Dolphin, said the firm recently considered changing its asset allocations to a more defensive position with regards to Europe but chose to hold its ground. He says that a Greek exit need not be as disruptive as many assume, as central bankers and politicians have had time to prepare contingency plans.

“If anti-bailout parties take a large share of the vote I think we will see a large reaction in the markets – for the FTSE 100 we could be talking about several hundred points,” he says.

On the other hand, a win for pro-bailout New Democracy and its potential coalition partner, Pasok, will probably give markets a substantial fillip, and Greece will struggle on with its austerity drive.

The third possible outcome, another hung parliament, is regarded by many as the worst case scenario, leaving Greece unable to comply with the terms of its bailout in time for the next tranche of funds, due at the end of the month.

Jeremy Batstone-Carr, chief economist at wealth manager Charles Stanley, says the country would be left with no functioning government, would run out of cash and be forced to shut down services and default not just on debts but on welfare payments. He believes Greece’s overall debts are much higher than generally reported, at about ¤1.3 trillion (£1.1 trillion), with the consequences of a default or currency switch set to spread across global financial institutions.

But Lenhoff says that the worst-case scenario could be best in the long term, as it will force the politicians to unite and provide a comprehensive solution to the wider crisis – one which would see Germany accepting some inflation and supporting measures aimed at boosting growth. “It could be a transformational moment for the Eurozone,” he said.