Having failed to form a government, Greece announced that it will go to the polls again, boosting the risk of a Eurozone exit. With elections planned for the 17th of June, uncertainty will inevitably drag on until then. Market commentators now say there’s a 50-75% chance that Greece will leave the Eurozone.
A Greek exit might be positive for the Euro, but peripheral countries, particularly Ireland and Portugal, would be hit hard, and could face large capital outflows as markets fear a domino effect. The Euro has continued its slide against the US Dollar, despite the Euro area avoiding a technical recession, thanks to strong GDP figures.
The governor of the Bank of England said recently that economic growth will be subdued and vulnerable to the Eurozone debt crisis and he worries that a “disorderly” outcome in the Eurozone were already hurting Britain’s growth prospects. Sterling rose to a 3.5-year high against the euro on worries about political instability in Greece. In addition to those problems, concerns remain about deep debt and economic problems in Spain, while Moody’s cut ratings on 26 Italian banks, heightening worries the Greek debt crisis could scar peripheral Eurozone economies.
The Australian dollar fell against the Euro on fears that Greece is moving a step closer to a messy exit from the Eurozone. Markets worry that the fresh Greek election could hand victory to leftists who might renege on an international bailout deal, pushing the country towards bankruptcy and out of the Eurozone. This would not only destabilise the region, but also deal a severe blow to an already fragile global economy. The Reserve Bank of Australia’s big 50 basis point rate cut on May 1 and its lower growth and inflation outlook, as well as a slowdown in China, Australia’s major export market, all conspired to weaken the currency in the past few weeks.
Greece has no government as the two main pro-bailout parties failed to win a majority in recent elections, leaving questions over the country’s ability to avert bankruptcy and stay in the euro.