Investors have seen a further downturn in the stock market rollercoaster ride running up to and over the weekend, as political upheaval in France and Greece cast fresh doubt over the future of the Eurozone.
The Euro sank to a 3-and-a-half year low against the pound and a three-month low against the US dollar before clawing back lost ground.
There was also turmoil on European stock markets. Shares in Greece tumbled nearly 7%, with banks leading the way, in the wake of the weekend’s elections.
It has been a busy weekend in politics :-
- the Greek conservative Antonis Samaras now having three days to form a coalition government. He is , faced with EU warnings to keep to the tough terms of the international bailouts but there are renewed fears Athens may default on its debts and leave the Eurozone.
- Mr Hollande campaigned on a platform of renegotiating the terms of the EU fiscal pact to concentrate more on reviving economic prosperity than simply reducing budget deficits.
There are serious concerns that Europe is facing a fresh economic crisis after France elected Francois Hollande and the Socialist Party, a result that is being held as a rejection of austerity measures imposed amid the Eurozone Crisis. It is expected that he will in effect, tear-up last December’s controversial deal to save the euro from oblivion. It is expected, he will seek talks with the ECB (European Central Bank) and German Chancellor Angela Merkel to demand further borrowing to boost growth.
The menace to the single currency was compounded when voters in near-bankrupt Greece also rejected plans to impose tough financial discipline.
City analysts said that while stock markets had expected a Hollande win, the results in Paris and Athens could tip the strained Eurozone back into turmoil. This could be good-bye to austerity measures and hello to the threat of financial chaos. The outcome to the French election has grabbed all the major headlines. However Greece’s inconclusive and dangerous election result may be even more significant. Greece is close to collapse.
The Results :-
- Mr Hollande defeated Mr Sarkozy by 52% to 48% in only the second time a sitting French President has failed to win a second term
- Greece’s conservative New Democracy and socialist PASOK parties risked falling short of the 151-seat majority needed to form a coalition government;
- Financial experts warned that the Euro could collapse within months;
- British officials admitted that David Cameron made a serious error by ostentatiously backing Mr Sarkozy’s re-election bid.
The new French President has pledged to spend an extra 20 Billion Euros in the years ahead to kickstart the economy and wants to slap a 75% tax rate on those earning more than one million euros a year, or around £850,000.
He says he ‘dislikes the rich’ and has singled out ‘the world of finance’ as his principal enemy. Some analysts have suggested that this could be the first steps to the start of the break-up of the Euro. It is predicted that the ECB might have to lend more money to banks if there is another stock market ‘wobble’ in response to Francois Hollande’s triumph.
In addition to this, some analysts are reporting that France’s affairs paled beside the impact of the Greek election and persistent fears that Spain will be the next European domino to fall. Greece is close to collapse and Spain is deep in a financial quagmire. There are growing concerns that if matters are not brought under more structured control in the next 18 months, we may very well see a split (or several) in the Eurozone.
My Analysis
The election results have set the backdrop for an extended period of volatility and I expect investors to take time to come to terms with a socialist government in France and renewed uncertainty in Greece. In addition, the borrowing costs in Germany have hit a record low of just over 1.5% (possibly a new ‘flight to safety’), while gilt yields in the UK were 2%. This compares with nearly 23% in Greece, 5.77% in Spain, 5.46% in Italy and 2.8% in France.
While I think that the outcome of the French election was widely anticipated, as with every event in life, until it happens, it is a shock. This as a global event needs to be coupled with the fiscal and political situation in Greece – it is highly uncertain and the Eurozone’s weakest link just got weaker. A Greek eurozone exit is now firmly on the cards.
I am expecting the situation in Greece, with the problems in Europe, in addition especially in Spain and others should put markets in risk-off mode. This is before further data arrives from the global issues in developing economies (especially China), US, Middle East and Africa.
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