Greece and France send markets into the red
AFP PHOTO / Angelos Tzortzinis
With Greece obviously ungovernable after yesterday's elections that turned out an fragmented political landscape, and François Hollande's victory in the the presidential race in France, European capital markets opened today with heavy losses.
The Athens stock exchange started at 8.5% down, with the rest of bourses losing up to 2%. The euro also lost some ground.
Basically, the worst case scenario for the financial markets, came this Monday (7May).
Later on in the day, however, losses were diminishing. Investors are now worried about the future of the Eurozone, fearing that Greece may return to the December 2011/January 2012 dead ends, and France under Hollande will want to add a growth chapter to the Fiscal Pact, a prospect which might lead to new deficits.
It is possible that all this may lead to a relaxation of the austerity policies inspired by Berlin. The European political horizon is becoming all the more foggy, with uncertainty taking hold one country after the other. During last week analysts were drafting scenarios for Monday 7 May, saying that the worst could come from Athens. But lets take one thing after the other.
Elections
The victory of François Hollande does not represent a major threat to financial markets. What the new occupant of the Champs Elysée will be pressing for is the Brussels and Berlin dignitaries to accept is an addendum to the Fiscal Pact. Not to demolish it.
Hollande made central the idea of growth in his electoral rhetoric, and voters approved it. In reality this narrative about the economy, with growth to be added to fiscal deficit cuts, is not being denied by anybody. Who wouldn't prefer the current Eurozone to grow? It goes without saying that growth will make things easier in addressing the phantasm of sovereign debt. The difficult thing, however, is how to achieve it?
Germany has already rejected the idea of implementing new growth policies by increasing public spending and, consequently, public debt. Everybody knows that there are no more willing investors in the capital markets to finance more government spending by buying up more sovereign debt. Only the ECB can do that, but this will entail inflation risks. Nor is easy to mobilise direct private investments in infrastructure projects by using as catalyst the European Investment Bank's borrowing abilities.
There are limits to what more EIB can borrow, and retain its triple A rating, however.
Last but not least, the political forces which promote the idea of growth in France and Greece, are not ready to apply supply-side economic measures, by relaxing labour market protective legislation aiming at reducing labour cost to businesses. Nor is it feasible to cut down on social contributions to achieve the same end because the dreadful financial status of pension funds does not permit that. In short, the notion of growth is very attractive discussing it, but very difficult to see how it can be achieved. At the end, under the pressure of Paris, the Brussels and Berlin decision makers will presumably agree to draft a new chapter in the Fiscal Pact, to promote economic growth. But the means to achieve it will be very limited and the final outcome will not be of importance. Unfortunately at the same time the problems in confronting the Eurozone periphery's sovereign debt and the drive for the recapitalisation of the banks are posing grave problems. The European Financial Stability Facility (EFSF) had to give to Greek banks €28 billion last week, in order the Greek lenders to confront the fast worsening rates of bad debts. Sources in Athens say that one out of five bank loans in Greece is not served and the lenders try to cover parts of it by according rescheduling on demand. This brings us to beautiful shores of Greece.
Greece
Yesterday the Greek electorate denied to give a viable solution by deeply fragmenting the political landscape. Voters punished the two mainstream political parties, the socialist Pasok and the centre-right New Democracy, for bringing the country to this desperate situation and voted for extremists on both sides of the political spectrum.
The neo-Nazi Golden Dawn party, until yesterday a marginal group of bullies, got 7% and 21 deputies in a house of 300, while another quite new extreme right wing formation of 'Independent Greeks' got 10.5% and 33 deputies. The same attitude of protest send a small until yesterday left wing party, under its youth leader Alexis Tsipras, to the second place (main opposition) with 16.8% of ballots and 52 deputies. The once-mighty socialist Pasok came third with 13.2% and 41 deputies. New Democracy was voted first with 18.9% and 103 deputies. In this way, the much hoped-for by Brussels and Berlin coalition government of Pasok-ND, is not possible. Those are the two main parties which support the terms of the second Memorandum of Understanding the country signed last March with its creditors EU-ECB-IMF, and obviously they were punished for applying the austerity going with it.
As things stand now the political future in Greece is quite unpredictable. The first costs to the rest of the Eurozone are being already born by the EFSF. There will be more because the Greek banks will be using this as collateral to raise more money from the ECB. In any case, Athens is again entering a period of unpredictability, with costly repercussions to rest of the Eurozone, primarily to be born by the financial support mechanisms and by raising the borrowing cost for Spain and Italy. However the possibility of Greece willingly leaving the Eurozone is minimal. Only the Greek Communist Party (8.5% and 26 deputies) openly supports this prospect.
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