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Greek Election Defuses One Crisis, but More Lurk

Published: June 18, 2012 | 10:05 am
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Investors expressed relief over the projected victory of pro-bailout parties in the Greek elections on Sunday, but they quickly turned their attention to the structural problems in southern Europe that continue to threaten the global economy.

The electoral success of the mainstream New Democracy party in Greece averted, at least for the time being, the doomsday prospect that had investors on edge in recent weeks: a sudden and messy exit of Greece from the euro currency had the leftist Syriza party won.

With a coalition led by New Democracy in power, Greece is likely to continue receiving the international aid it has needed to pay the interest on its debt and keep its economy afloat.

“We came close to the abyss and we have taken a step away from it,” said Marc Chandler, a global head of currency strategy at Brown Brothers Harriman.

Investors wasted little time signaling their approval on Sunday night, pushing up value of the euro, which had fallen in recent weeks amid fear that the currency would be certain to collapse after a Greek exit. In early trading on Monday in Asia, stock markets were up solidly across the board.

There are questions over how long the relief will last, however, given the failure of past efforts to resolve the Greek crisis and the country’s deepening recession.

“Unless they make a radical change, we will be back with another Greek cliffhanger in three or four months’ time,” said Darren Williams, a European economist at AllianceBernstein in London.

What is more, economists remain concerned about the debt and banking crises in several larger European nations, including Spain and Italy. These issues will take center stage at a series of coming international political gatherings, including a meeting of the Group of 20 nations that is set to begin on Monday in Mexico.

Later in the week, the leaders of the four largest European economies will meet to begin discussing ways to stimulate growth on the Continent while still shrinking budget deficits and debts.

Investors question whether European leaders can achieve the type of increased fiscal and political integration viewed as necessary to keep the Continent’s common currency alive.

Specifically, some European leaders have called for some kind of guarantee on bank deposits throughout the euro zone, which would help stop the flight of capital from banks, and for the European Central Bank to have the ability to issue euro zone bonds to help spread risk away from troubled borrowers like Spain and Italy.

Mario Draghi, president of the European Central Bank, last week promised a blueprint for increased integration “in a matter of days.”

“If there are not more decisions toward more integration in Europe, the euro will certainly not survive in its current shape with its current members,” said Antonio Garcia Pascual, the chief southern European economist at Barclays.

The situation is still better than many investors had expected immediately after the Greek elections in early May, which highlighted a surge in the popularity of the left-wing Syriza party.

The Syriza party had vowed to repudiate the country’s bailout agreement with the so-called troika of the European Union, the European Central Bank and the International Monetary Fund.

Without financing from the troika, Greek banks would have been unable to continue operating, forcing the country to drop the euro and return to the drachma, at great cost. This in turn would have raised doubts about whether other southern European countries could keep the currency alive.

Stocks fell for weeks after the May election, as investors sought to put their money in assets that could withstand a European crisis, most of all American Treasury securities.

But investors recently turned more optimistic about the Greek situation after signs that New Democracy would garner enough votes to form a coalition and, if it did not, that the world’s central banks would step in to provide greater liquidity in the financial system.

New Democracy’s victory appeared to alleviate the need for any coordinated action by central banks.

Both the European Central Bank and the Federal Reserve were silent after the results were announced.

Even with New Democracy in power, there are questions about whether the government will have the political will to adopt the budget cuts the troika has mandated. But leaders from elsewhere in Europe signaled on Sunday that they would be willing to negotiate with the new government to make the necessary budget cuts less onerous.

For many investors, though, Greece has long been a threatening sideshow to the banking and budgetary problems confronting the Continent’s fourth largest economy, Spain, and, to a lesser degree, its third-largest economy, Italy. (France is No. 2, and Germany No. 1.)

The Spanish economy has been increasingly hobbled by big losses in the country’s real estate sector.

The European Union tried to address the problem two weeks ago by giving the Spanish government up to 100 billion euros, or $125 billion, to prop up its banks.

But the optimism that initially greeted that plan faded fast. Since then Spaniards have withdrawn their money from the country’s banks. Investors have shown their distaste by selling Spanish government bonds, sending the yields on those bonds to record levels.

In case Europe’s turmoil was not enough to discourage investors, markets have also been hit by a string of economic reports showing that growth has been slowing in both the United States and China.

The recent uptick in the United States jobless rate has created hope among some investors that the board of the Federal Reserve will offer a stimulus plan when it meets this Tuesday and Wednesday.

“Generally the markets are looking for central banks to do something,” Mr. Chandler of Brown Brothers Harriman said.

Source: New York Times


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