Pound Euro Exchange Rate Breaches 1.2500 For First Time Since 2008 As Greek Debt Fears Heighten

Published: Tuesday, 15 May 2012 09:00 BST - Written by David Woodsmith

STORY LINK Pound Euro Exchange Rate Breaches 1.2500 For First Time Since 2008 As Greek Debt Fears Heighten

The ongoing soap opera which is the Greek debt crisis took several twists and turns during yesterday’s session in the markets. The most significant development on the day came in the form of an announcement from the leaders of the ‘socialist light’ Democratic Left party which revealed that they would not enter into any coalition government which did not include the hard-line anti-bailout Syriza bloc. Ultimately, the decision by ‘Democratic Left’ makes the formation of a coalition government before Thursday’s Greek state opening of parliament highly unlikely, as the two parties which traditionally enjoy the largest popular support, PASOK and New Democracy remain fervently ‘pro-bailout’ and will not consider Syriza as a potential coalition partner.

The upshot is that Greece is likely to hold another general election next month, with Syriza and the ‘Democratic Left’ standing on an unofficial ‘anti-bailout’ ticket. There is a strong possibility that this may sweep them to victory, triggering a debt default by Greece. Yesterday’s movement in global equities markets showed a ‘pricing-in’ of this outcome, with shares losing ground across the board. Paris’s Cac 40 index was particularly hard-hit, losing over 2% of its value on the session. French financial sector shares dragged the Cac lower on the day, with Credit Agricole losing over 5% of its market value and Societe Generale losing a slightly lesser amount. These losses reflect the heavy exposure of France’s banks to Greek bonds, which they have hoarded over the last few years due to their seemingly attractive yields. This is an action they may well come to regret as the year progresses.

The developments in Europe saw the Pound enjoy a rare day as the best-performing major currency in the markets, as institutional investors shifted their funds out of euro-denominated assets and into the relative safety of Sterling. This pushed the GBP EUR exchange rate through the psychologically key 1.2500 level for the first time since the autumn of 2008. The fervently ‘risk-off’ trading environment saw the AUD, NZD and ZAR suffer sustained losses on the day.

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