Weekend election results fail to ease ‘grexit’ fears

The post Greek election Euphoria was short lived this morning, with an initial sign of relief that the pro-bailout New Democracy party won the largest share of the vote. The 50 seat bonus for New Democracy reduced the risk of the imminent eurozone exit that may have been on the table had Alexis Tsipras’s Syriza party gained the most seats in the election. Major European stocks indices rose up to 2%, the euro was higher and Spanish and Italian bond yields fell. The Athens stock exchange was higher by around 6%, led by banking stocks that rebounded with the reduced likelihood of a bank run. It appeared a catastrophe was averted but severe problems remained to be solved.

Within an hour of trade however, it was apparent that the market was still sceptical about the solutions for Greece, with uncertainty over how the Trokia of lenders will react to requests from even pro-bailout parties who are to seek a loosening of the austerity measures Greece is already bound by. It is likely that concessions will be sought from whichever government emerges, given the turmoil of the last few months has weakened the economy, reduced tax take and will ultimately lead to missed fiscal targets. Greece is at present required to make a further €11.7 billion of spending cuts in June to qualify for the next tranche of aid. With an inconclusive election, New Democracy leader Antonis Samaras was given the mandate to form a colaition government, and now has three days to do so before the task falls to Mr Tsipras of Syriza.

Contagion fears also surfaced with Spain firmly in the spotlight with its 10 year borrowing costs rising above 7%. Towards the European closing bell, broadcasts highlighted comments from German Chancellor Angela Merkel, who suggested the bailout terms will not be relaxed for Greece. The euro hit session lows, losing more than 1%.

Global markets were mixed heading into the European close, with the FTSE 100 and German DAX hanging onto gains, although the French CAC was lower and the Spanish IBEX was around 2.5% in the red. Spanish banks were under pressure following news that bad loans in Spanish banks were at their highest level for 18 years.

The FTSE 100 closed 0.2% lower at 5492, weighted down by financials. The German DAX was similarly higher, although the French CAC lost nearly 1% and the Spanish index was lower by 3%. Brent crude lost almost 2% to $95.9/bbl.

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