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'Grexit' fears hammer European markets
[ATHENS] Fears that Greece could end up leaving the eurozone after elections later this month rattled European markets on Monday, with stock prices hammered.
Greek stocks sank more than 5 per cent, while the Paris, Madrid and Milan exchanges fell more than 3 per cent, and the euro hit a nine-year low on renewed concerns about the currency bloc.
The spectre of a Greek exit from the eurozone has reared its head again despite a plea by French President Francois Hollande on Monday for Greece to abide by its European commitments and the European Commission saying eurozone membership was irrevocable.
"The Greeks are free to choose their own destiny. But, having said that, there are certain engagements that have been made and all those must be of course respected," Hollande told French radio.
But European Commission spokeswoman Annika Breidthardt said that "euro membership is irrevocable", citing EU treaties.
The comments came amid fresh political turmoil in Greece ahead of an election on January 25, with the far-left Syriza party currently leading in the polls.
Over the weekend, the Der Spiegel weekly quoted German government sources as saying that Berlin sees a Greek exit from the eurozone as "almost inevitable" should the radical leftist Syriza party win the snap poll.
Both Merkel and her finance minister Wolfgang Schaeuble had come to consider that Greece's departure from the single-currency bloc would be "manageable", the magazine said.
German media saw the Spiegel article as an attempt by Merkel and Schaeuble to put pressure on Greeks and Syriza leader Alexis Tsipras, who has vowed to end austerity policies.
The European Union and the International Monetary Fund have overseen two massive international bailouts worth 240 billion euros (US$286 billion) for Greece after its debt crisis nearly brought down the eurozone.
The funds were contingent on reforms that saw the Greek economy contract by more than a fifth over six years, with growth just starting to return but unemployment still running high.
Merkel and Schaeuble reportedly believe that the relative strength of other countries on the fringes of the eurozone mean that this time a so-called "Grexit" would be bearable.
Investors were not as confident, sending the yield on safe-haven German 10-year bonds to a new record low of 0.492 per cent, while the euro slid to US$1.1864, its lowest level since March 2006.
The euro was also under pressure from heightened speculation that the ECB will buy eurozone government bonds to counter deflation risks, which normally would have boosted stocks.
The yield on Greek 10-year bonds climbed to 9.556 per cent, up from 9.250 per cent on Friday, a prohibitive rate for the country to borrow on markets.
"It's a new year but it's the same old story... eurozone jitters get markets wobbling again," said Jonathan Sudaria, a dealer at London Capital Group.
"European equity markets traded under renewed pressure on Monday as fresh concerns regarding Greece and the euro saw heightened risk aversion among investors," said analyst Kash Kamal at Sucden Research.
Greek stocks finished the day down 5.6 per cent, while Milan tumbled 4.92 per cent, Madrid 3.45 per cent and Paris 3.31 per cent.
Frankfurt's DAX 30 fell 2.99 per cent and London's FTSE 100 gave up 2.0 per cent.
The early elections were triggered after a political gambit by Prime Minister Antonis Samaras backfired. His attempt to get a new president elected by parliament early failed last week, forcing general elections to be called.
The far-left Syriza party, currently the front-runner in opinion polls, has pledged to unwind many of the reforms imposed by the EU and IMF by cutting taxes and increasing state aid and public services.
France's Hollande also acknowledged that a Grexit is possible.
"As for Greece staying in the eurozone, it's for Greece itself to decide," Hollande said.
Hollande's comments also revealed that this time Germany and France are divided on Greece.
Hollande acknowledged that he and Merkel - from opposite ends of the political spectrum - "do not have the same outlook, but we have the same interest: to make Europe stronger, with more solidarity in its choices and more active in its growth policies." The French president also announced that he would hold talks with Merkel on Sunday "to discuss the future of Europe", with sources close to Hollande's office saying that the meeting would take place in Strasbourg.