Stock prices pass along a digital ticker screen inside the Hellenic Stock Exchange as stock and bonds plunged after the government was defeated in a parliamentary vote on electing a new president in Athens. Investors took fright at the prospect of the leftist Syriza party coming to power in an election slated for January 25.
Greek bond yields shot higher yesterday after parliament rejected the government’s candidate for president, paving the way for national elections early next year.
Investors took fright at the prospect of the leftist Syriza party — which has vowed to write off much of Greece’s debt, renegotiate its EU/IMF bailout and roll back austerity — coming to power in an election slated for January 25.
The political uncertainty could send Greece back into recession, complicating even further its efforts to bring down the country’s debt from about 175% of economic output.
Some investors fear any brinkmanship between Athens and Berlin or Brussels over re-negotiating some of the €240bn in loans agreed with the EU and the IMF could revive concerns over Greece’s future in the euro area.
Bookmaker Ladbrokes slashed its odds on a 2015 Greek exit from the euro to evens from 2/1.
Yields on 10-year bonds rose 120 basis points to 9.73%, their highest in over a year, after the government’s candidate failed to secure enough support from lawmakers in a final round of voting.
Three-year yields were up 205 bps at 12.30% , a level at which borrowing on financial markets would be unaffordable. Short-term yields trading above longer-term ones indicate investor fears of default. Private investors hold Greek government debt worth about €54.6bn, or 17% of the country’s overall debt of €318bn. The rest is owed to the official sector.
The Athens composite equity index tumbled more than 11% before paring losses. The cost to insure Greek debt against default via five-year credit default swaps rose to 1,219 bps from 986 bps on December 24, according to data from Markit.
“The unfolding Greek political crisis has served as a reminder for investors that political risk is the main factor driving sovereign default risk in the eurozone,” said Lena Komileva of consultancy G+ Economics.
“It is also a reminder of the policy deadlock that exists in the heart of the euro monetary union between EU creditors’ conservative austerity instincts and the need for greater growth stimulus just about everywhere else.”
The sell-off in Greece spilled over to other low-rated euro zone government debt, with investors fleeing to top-rated bonds.
Italian and Spanish 10-year yields hit highs of 2.03 and 1.73% shortly after the vote, while German equivalents fell to a record low of 0.546%. Dutch, French, Austrian, Finnish and Irish yields hit record lows.
Italian Prime Minister Matteo Renzi ruled out any risk that political instability in Greece may produce renewed market pressure on Italian assets.
Some analysts fear a victory for Syriza in Greece could bolster challenges from populist parties elsewhere. In Spain, the anti-establishment Podemos party has already split the country’s two-party system as elections approach next year.
“What I see from this is more a medium-term political risk for the euro zone,” said Norbert Wuthe, rates strategist at Bayerische Landesbank.
But others remain confident that problems in Athens can be contained, unlike in 2011-12, when eurozone member states’ indebtedness prompted panic selling following the global financial crisis.
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