World Financial Markets Down on Greek Euro Exit Fears
World financial markets have seen strong downside pressure this week as fears intensify that Greece could leave the euro. Losses were seen in in the US on Monday as the S&P 500, which is often seen as a barometer for risk appetite, closed the trading day at its lowest level seen since February this year. This bearish day for U.S equities was accompanied by falls in Asia on Tuesday morning as Japan's Nikkei dropped 1.1%, Australia's ASX 200 declined by 0.7% and the Chinese Shanghai SE Composite index dropped by 0.8%.
Risk aversion flows have seen the US 10-year Treasury Note yield moving lower, by as much as seven basis points, to 1.771%. 10-year yields have previously dropped to levels as low as a record 1.67% on September 23rd 2011. 10-year note yields may decline to a fresh record low if conditions in Europe continue to deteriorate and thus increase the demand for safer assets.
The EURUSD major currency pair is trading down almost 3% on the monthly basis and a dropping euro means that other countries are at increased risk. The euro/dollar exchange rate dropped below the key 1.3000 psychological level on the 7th May and has been under the hammer ever since. Spanish borrowing costs are close to dangerous levels. On Monday, Spanish benchmark borrowing costs, in comparison with the German equivalent, increased to what is the highest level since the introduction of the eurozone. Spreads on the Spanish 10-year rate and German Bunds reached a euro-era peak at 486 basis points.
Greece’s political situation is said to be in a stalemate situation as Athens has failed to come to a power-sharing agreement. If the current round of talks fail then Greece is to face fresh elections. This uncertainty is one of the main drivers for the bearish markets we are seeing as fears grow that a Greek exit from the euro may be a possibility.
Former Greek Prime Minister Costas Simitis has said Greece must be part of the euro area and it would be a “catastrophe” if they were to revert to utilising its own currency again (Greece previously used the drachma). ECB Governing Council member Patrick Honohanhas has subsequently advised that a Greek euro exit could be managed but it would affect confidence in this area; Honohanhas said “It is not necessarily fatal, but it is not attractive”.