Europe: Political Uncertainty and Falling Euro

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Following the elections in Greece and France, the euro continued to fall and reached a fresh four-month low on Tuesday, hitting a trough of $1.2643.  It was hurt by worries that the Geek political parties could not be able once again to form a government at the forthcoming second elections in June. The euro continued to be under pressure as fears of a messy Greek exit from the euro zone weighed on the euro and kept the single currency pinned near a recent four-month low.

The leader of Greece’s Left Coalition party SIRIZA said last Tuesday that the country’s commitment to a European Union and IMF rescue plans had become null and void.

Anti-bailout parties performed well in Greece’s vote on May 05, 2012, thus raising the risk of more opposition to already unpopular reforms. Greece’s two leading pro-bailout political parties failed to win a majority in elections and to form a government, posing questions over the country’s ability to prevent bankruptcy and stay in the euro-zone.

Investors were focused on Greece, where  second round of election were scheduled to be held on 17 June 2012 after a coalition government was unable to be formed following the May  and this  threw the country into political crisis and increased the risk of euro zone exit.

The euro’s drop had accelerated the previous day after Dow Jones quoted former prime minister Lucas Papademos as saying Greece had no choice but to stick with a painful austerity program or face a damaging exit from the euro zone, a risk he said was unlikely to materialize but was real.

“The (Papademos) comments were like very strong poison, and the market got flung around by them,” said Satoshi Okagawa, senior global markets analyst for Sumitomo Mitsui Banking Corporation in Singapore.

The elections results made doubtful  the EU/IMF aid package, negotiated in May 2012.  As a result of the deal  86% of private creditors agreed to participate in the transaction,  totalling 172 billion euros and and lost 74% of their assets. This way Greece secured a second bailout after the first one in 2010 when the country received 110 billion euros bailout and in return its lenders have attached strict conditions to the loan.

“There’s potential for uncertainty and instability in Europe,” said John Praveen, managing director of Prudential International Investment Advisors in Newark, New Jersey. “The market is pricing in extremely negative scenarios.”

“One issue is whether this will cause investors to shun risk globally, or be viewed as the euro’s problem alone and just lead to weakness in the euro,” said Koji Fukaya, director of global foreign exchange research for Credit Suisse Securities in Tokyo.

While the common currency might not fall very sharply since market participants have already placed bearish bets on the Euro, it may continue to slide down to $1.28 over the coming weeks.

The euro dipped to around $1.2643 earlier, very close to last week’s four-month trough of $1.2642, and not far from a 2012 low of $1.2624 set in January. A drop below the January low would take the euro to its lowest level since August 2010.

The results of the presidential elections in France also raised the political tensions and contributed to the slump of the euro. The elected Socialist French President Francois Hollande has advocated an approach to tackling the debt crisis centered more on growth, which may raise tensions with Germany’s persistence on fiscal austerity. Markets are looking to see if Hollandewill be capable to square France’s need for economic and fiscal reforms together with his announced projects to promote growth.

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7 Responses

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