Fear Grips Global Markets As Greek Politicians Countenance A Sovereign Debt Default

Published: Wednesday, 9 May 2012 09:00 BST - Written by Tim Boyer

STORY LINK Fear Grips Global Markets As Greek Politicians Countenance A Sovereign Debt Default

The precarious political situation in Greece informed price action in the currency markets during yesterday’s session, sending the value of the high-yielders and commodity currencies tumbling. Not surprisingly, the euro didn’t fare too well either.

To recap, the story so far has seen Greece build up unmanageable debts which it has no hope of servicing using its own means. This caused Greek policy makers to agree a series of bail-out packages with the EU/IMF/ECB ‘Troika’. The price that the troubled Hellenic state had to pay for accessing these emergency funds was its acquiescence to a raft of swingeing tax hikes and government spending cuts. Unsurprisingly, these measures proved vastly unpopular with the Greek electorate and at the weekend, they voiced their displeasure when 70% of votes cast in the country’s general election were in favour of ‘anti-bailout’ parties. The centre-right, pro bail-out New Democracy party garnered the largest share of the segmented popular vote, at a mere 18.85%. However, the party’s leader Antonis Samaras quickly declared his inability to form a coalition government.

This has allowed the left wing Syriza bloc, who secured the second largest share of the vote, to step in in an attempt to forge a ‘coalition of the unwilling’ – unwilling, that is, to accept the terms of the Troika’s ongoing bail-out funding. Without this funding, Greece will be unable to meet its next round of debt commitments, triggering a disorderly sovereign default, which will plunge the financial markets into a new darker, deeper abyss than the credit crisis of 2007. Alexis Tsipras, the leader of the Syriza bloc added fuel to the flames yesterday by stating his intention to ‘tear up’ the terms of Greece’s EU/IMF/ECB bail-out.

The developments in Greece caused fear to take a hold in the markets once again, triggering sustained losses in equity markets, while the Australian, New Zealand and Canadian Dollars suffered pronounced losses as investors priced-in the massive negative effect on global growth that a ‘hard default’ by Greece would surely precipitate.

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