In the last week, market sentiment has been squarely aligned with an assumption that an anti-austerity government in Greece would lead inevitably to the cessation of bailout payments, a consequent sovereign default and either secession or expulsion from the single currency.
Today last ditch talks led by President Karolos Papoulias looked unlikely to make headway after the leader of the radical leftist SYRIZA party said he would not attend and another left-wing leader refused to take part in any coalition without him.
With Greece set to run out of money as early as next month and no new government in place to negotiate the next aid instalment, investors have begun betting that a chaotic Greek default and euro exit will happen sooner rather than later. Such an outcome would pull the euro back from the brink and further postpone the day of reckoning. It would be pointless in the long run of course. Greece would still be saddled with impossible debts and shrinking output. But the longer a breakup can be put off, the more chance there is of preventing it becoming a catastrophe.
The biggest fear for the euro zone is that chaos in Greece could drag the much larger economies of Spain and Italy down and threaten the entire currency area’s existence, a risk markets are beginning to price in. The cost of insuring Spanish government debt against default hit an all-time high on Monday and the premium investors demand to hold Spain’s debt rather than Germany’s reached its highest point in the currency bloc’s history.
Needless to say it was Athenian politics, not UK and US producer prices, that dominated financial markets on Friday. Investors’ appetite for the euro is at rock bottom.
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