Surging towards a Greek catastrophe

Athens appears no closer to finding a solution to its political impasse, with the austerity debate leaving the country's mood bleak, while Spanish banks are causing Madrid further pain.

Anxious investors piled into German and UK bonds overnight, pushing their yields to historic lows, as markets were again weighed down by concerns over Greek political turmoil and Spain’s troubled banking system.

Athens appeared no closer to finding a solution to its political impasse, after Alexis Tsipras, the leader of the country’s radical left party, failed in his attempts to cobble together a majority in the country’s fractured parliament. Tsipras insisted that Greece’s two mainstream parties – the Socialist Pasok party and the conservative New Democracy, both of which saw their support wither in Sunday’s polls – dump the commitments they made in order to secure Greece’s €130 billion bailout if they wanted to form a political partnership with his Syriza party.

It’s now the turn of Pasok leader, Evangelos Venizelos, to try to form a government. Overnight, he claimed that he wanted to form a national unity government that would bring together all the political forces in favour of Greece remaining in the eurozone. "The overwhelming majority of people want to keep the country in the euro, because leaving would mean poverty and lower revenue”, he said.

Venizelos is under intense pressure to form a government in order to avoid fresh elections, which would doom the country to a long period of political instability, and would likely prove just as inconclusive as Sunday’s poll. He is also desperate to prevent Tsipras sending a letter to the European Union informing it that Greece’s austerity program was now dead, as his camp has suggested he would do.

The country’s mood is bleak. According to the Greek newspaper Kathimerini, Greece is now plunging headfirst into a catastrophe. "If a government of national salvation isn’t formed in the next few days, new elections will become inevitable”, it cried.

Meanwhile, European leaders have warned Athens to honour its austerity vows or they will cut off payments from the country’s €130 billion rescue plan. In a highly symbolic decision overnight, European leaders decided to pay €4.2 billion in previously agreed financing for the country (most of which Greece will spend next week repaying a €3.3 billion loan to European Central Bank) but they held back a further €1 billion of funds.

German Finance Minister Wolfgang Schuble underscored the message that Greece’s bailout was non-negotiable. There was, he said, no way to compel Greece to remain in the eurozone. But if Greeks wanted to stick with the euro, "there's no better way than the one we've agreed."

Meanwhile, investors are fretting that Madrid’s commitment to saving the country’s troubled banks will put severe strains on Spain’s finances.

On Friday, the Spanish government will outline its latest rescue plan for the country’s banks. According to the Spanish financial newspaper, Cinco Dias, the new plan will require Spanish banks to make around €35 billion in additional provisions for their soured property loans. This is on top of the €54 billion in extra provisions that the banks were ordered to make in February.

As part of the rescue plan, the Spanish government will take a 45 per cent stake in the troubled savings bank, Bankia, by converting a €4.5 billion loan from Frob (the state bank bailout fund) into equity.

Investors reacted nervously to Madrid’s plans, with yields on 10-year Spanish bonds climbing above the crucial 6 per cent level, while Spain’s share market dropped 2.8 per cent to hit its lowest level in nine years. Bank shares were hardest hit, with giant Banco Santander falling 4.5 per cent, BBVA dropping 4.73 per cent, while Bankia was down 5.8 per cent.

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