By Jason Gaywood, director at currency specialist HiFX
Last ditch attempts to form a coalition government in Greece have now officially failed as the country now faces a re-run of elections next month. Meanwhile, as President Hollande settles in to his new office in Paris, financial markets are punishing the Euro, which is trading at close to four year lows against Sterling, EU Sovereign Bond Yields and European Equities. The reason is simple — both these events make the outright collapse of the already seriously compromised Euro ever more likely.
The fear in Greece is that the left wing Syriza Party will win an overall majority - they have pledged to reject the current austerity measures in favour of less onerous terms for the current Greek bailout. Simultaneously, President Hollande has demanded a renegotiation of bailout terms for troubled EU members to increase the emphasis on growth rather than cutbacks in spending.
It would appear that these two unlikely allies are on a collision course with Germany. Both the Chancellor Angela Merkel and the German Finance Minister Wolfgang Schaeuble vehemently maintain that the terms of the only recently negotiated European Fiscal Pact be respected and maintained and that Greece must fulfil the obligations made regardless of the new election outcome.
The overwhelming concern of the Markets is that we are now in an irretrievable catch 22 situation with seemingly no positive outcome to this latest twist in the crisis — if the EU stands firm and Greece defaults, its ejection from the Euro will trigger a run on a number of European Banks and lead to a contagion risk with other members such as Portugal, Italy, Ireland and even Spain following in quick succession spelling an ugly end to European Monetary Union. The other, equally unpalatable, outcome would be a relaxing of Greek terms leading to understandable demands from Ireland (who was bailed out in 2010) for similar concessions and significantly increase the likelihood that Italy, Portugal and Spain would seek such external support. In this situation, the much publicised European Stability Mechanism which extends ‘on paper’ to some EUR500bln would not be either big enough or easy enough to raise in time to save the Euro.
The knife edge facing policymakers, the ECB and the IMF in this increasingly desperate situation looks ever more impossible to balance upon and we are almost certainly witnessing the final death throws of the Euro in its current incarnation.
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