Euro slumps as Greek elections signal fears for bail-out package

BRITAIN’s stock market will reopen on a knife-edge today as investors get their first opportunity to respond to Sunday’s anti-austerity votes in France and Greece.

European shares fell to four-and-a-half-month lows yesterday after the only two major Greek parties backing an EU/IMF austerity-for-aid programme to keep the country in the single currency failed to win enough votes to form a ruling coalition.

Greek shares dived 8 per cent and the euro fell heavily as analysts said political events had sharply cut the odds on the country quitting the single currency, which is widely feared would trigger fresh banking and markets panic.

Sentiment was also hit by socialist Francois Hollande winning the French presidency from right-wing incumbent, and backer of the European austerity programme, Nicolas Sarkozy.

Nick Parsons, market strategist at nabCapital, said: “We might see six to eight weeks of volatility in London and other financial markets now.

“The Greek result was the worst of all possible outcomes. The extreme right and left are now in the parliament and it significantly increases the likelihood that Greece will leave the euro.

“By contrast, the French result was less of a shock for markets because virtually all opinion polls over the past three months had been predicting a Socialist victory.”

Francois Savary, chief investment officer at Swiss private banking firm Reyl, said: “France is not the problem – the bigger problem is Greece.”

The euro hit a three-and-a-half-year low of 80.37p against the pound and breached $1.30 against the US dollar for the first time in three months.

Tristan Cooper, sovereign debt analyst at Fidelity Worldwide Investment in London, said of the Greek election results, which many expect to lead to new elections within two months: “The eurozone’s weakest link just got weaker. A Greek eurozone exit is now firmly on the cards although the probability and timing of such an event is uncertain.”

Markets are also worried that Hollande will insist on a watering down of pure austerity measures in Europe with growth initiatives that will put the pivotal German/French/European Central Bank relationship under strain.

“Despite professed sympathy for the growth dilemma, markets will punish any government that strays from its fiscal targets. Spain and the Netherlands were recently at the sharp end of the stick,” Cooper said.

A sign of the new nervousness was investors fleeing yesterday to safe-haven German bunds, and out of Spanish and Italian sovereign debt. German bund futures hit record highs of 142.44, up 14 ticks.

There were gyrations on other stock markets, Germany’s Dax index sliding 1 per cent before closing up 7 points and Paris down 0.3 per cent before ending up 53 points. Some market professionals believe financial markets over the next two months are as likely to drift up and down as go into nervous freefall.

Parsons at nabCapital said: “The most likely direction is sideways. People may see a Greek exit as not the end of the euro, but the beginning of the new euro. I don’t think any temporary slide would be sustainable.”