By Jason Gaywood, director at currency specialist HiFX
The bailout of Spanish Banks to the tune of EUR100 billion last weekend has served only to further exacerbate the dilemma faced by the Greek electorate as they go to the polls for a second time in two months on Sunday.
The bailout was a spectacular failure with Spanish borrowing costs now at a record high above 7% reflecting the opinion of the financial markets that simply bolstering the banks is not sufficient if you don’t bail out the economy as a whole. But more significantly, the move to fund the ailing Banks directly rather than the Spanish Government itself represents an ill disguised by-passing of the austerity measures already imposed on Ireland Portugal and Greece in previous bailouts.
This ‘moving of the goalposts’ is likely to further anger an already ill-tempered Greek electorate and increase the likelihood of the left wing Syrzia party gaining power. This outcome would be pivotal as Syrzia have already said they will reject the austerity measures that have been imposed and this result is likely to have far reaching consequences for everyone in the Eurozone as these elections now effectively represent a referendum on whether Greece remains within the Euro or casts itself adrift from the Eurozone and goes it alone with the Drachma.
In the worst case scenario, ejection from the single currency would mean that Greece would be cut off from any further ECB funding and almost certainly trigger a run on Greek Banks. This in turn would trigger a domino collapse in Portugal, Ireland, and now Spain.
Italy would be sure to follow and then the rest of the EU would be vulnerable by virtue of the systemic risk to UK, French and German banks to their crippled counterparts in Southern Europe. Ultimately Global trade would be paralysed as credit concerns would strangle critical trade with The Far East, The US and South America.
The world will be watching with bated breath on Sunday night as the votes of a mere 10 million people shape the economic prosperity of all seven billion of us in the coming years.
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