Lack of leadership reignites market jitters
After calming down over the past few weeks, global financial markets experienced renewed volatility this week due to political dithering in Europe. After the Greek Prime Minister backed away from a proposed referendum on economic reforms and resigned, the power transition needed to be seamless, but has been a comedy of errors. Disagreement within the socialist ranks meant plans to appoint former Central Bank governor Papademos fell through, then the ‘compromise candidate’ plan fell apart and when the ‘unity government’ began to fracture, they went back to plan A and announced that Lucas Papademos will be sworn in as PM tonight.
Unfortunately, Italy has replaced Greece at the centre of the Eurozone crisis and now appears to be on the brink of a funding crisis after bond yields rose to 7% for the first time in 14 years as commercial banks decreased their exposure to Italian debt. The Italian yield is now above levels where Greece, Portugal and Ireland needed assistance from the ECB. This rise followed statements from EU officials who stated there were no plans for a financial rescue of Italy and that they had not considered extending a temporary credit line to Rome. Meanwhile, a European clearing house complicated matters by increasing the margin demanded on Italian debt, effectively raising the cost of holding Italian bonds.
Meanwhile, outgoing Italian PM Berlusconi insisted on new elections rather than an interim government, which will likely prolong market uncertainty and delay critical reforms. European leaders’ desire for people to vote on economic reforms, while courageous, is highly unproductive as solutions need to be implemented with the speed of the Blitzkrieg, not the Battle of the Somme, with their modus operandi being to protect democracy, not practice it.
These developments destabilised a solid recovery in global sharemarkets with most major markets up over 10% in recent weeks. With the majority of global sharemarkets down on Wednesday, Thursday’s performance was a mixed bag, with the US, Italy and Germany rising, and the UK and France falling. This pattern could well continue until the markets determine whether the European authorities’ response is decisive or not.
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