Markets waver as relief over Greek vote fades

Markets waver as relief over Greek vote fades

The euro fell and borrowing costs for Spain and Italy rose on Monday as initial enthusiasm over a weekend victory for pro-bailout parties in Greek elections soon gave way to pessimism about the nagging debt crisis still facing the euro zone.

But a relief rally among risk assets fizzled and prices of safe havens such as US and German bonds, especially on the long end, rose. Yields on Spanish and Italian bonds also climbed in a clear sign that the Greek election did not remove investor concerns about the region’s debt crisis.

“The win in Greece does not really resolve anything. It’s still going to be tough for Greece," said Boris Schlossberg, managing director at investment advisory firm BK Asset Management in New York. “And with Spanish and Italian yields at high levels, the credit market remained sceptical that Europe is going to get out of the debt crisis."

The lack of a convincing popular mandate in Sunday’s Greek election to implement the deep spending cuts and tax increases demanded of Greece by the European Union and the International Monetary Fund also weighed on investors.

New Democracy leader Antonio Samaras, who needs to form a coalition government after after his party won Sunday’s election by a slim margin over the radical leftist Syriza party, said the country would meet its bailout commitments.

But he added: “We will simultaneously have to make some necessary amendments to the bailout agreement, in order to relieve the people of crippling unemployment and huge hardships."

Germany, already irritated at what it sees as the slow pace of Greek reform, ruled out more than minor delays to some targets in the rescue package— Greece’s second since 2010.

Chancellor Angela Merkel, speaking at a meeting of Group of Twenty (G-20) leaders in Mexico, said any loosening of Greece’s agreed reform pledges would be unacceptable and reiterated that Athens had to stick to the commitments it had already made.

Samaras voted in 2010 against the first €110 billion rescue because he thought it was too harsh. He now says Greece should have until 2016, not 2014, to meet fiscal targets set by under the bailout. His most likely ally to form a coalition, Socialist Pasok leader Evangelos Venizelos, wants a further year to reform.

“The consensus is that it’s a weak government in Greece," said Steven Bell, director and portfolio manager at GLC Ltd in London, a hedge fund with $1 billion under management.

“We have avoided ‘drachmageddon,´ but we’re still in a very weak situation. It’s almost like, ‘Let’s move on from Greece and let’s focus on Spain.´"

Spain called for the European Central Bank (ECB) to fight financial market pressures on the euro zone, and Italy said more must be done to shore up the bloc. Spanish treasury minister Cristobal Montoro told the senate during a budget hearing that doubts were lingering about the future of the euro zone. “The ECB must respond firmly, with reliability, to these market pressures that are still trying to derail the joint euro project," he said.

“We can see that the markets are not convinced," Italian Prime Minister Mario Monti said at a G-20 meeting in Mexico, according to Italian new agency ANSA. “We must draw up a definitive and clear road map with concrete actions that make the euro more credible."

Spanish Prime Minister Mariano Rajoy, like Montoro on Monday, has repeatedly called for the ECB to act to defend the euro zone, implicitly wanting it to resume a massive bond-buying programme that held down yields of government debt in recent months. The ECB is reluctant to fire up the programme again.

Monday’s market response underlined the problem facing the euro zone: short-term improvements in the climate do not get away from the fact that finances are perilously tight in the middle of an economic downturn.

Spanish 10-year bond yields were 26 basis points higher at 7.18% after hitting 7.30% earlier in the session, the highest in the euro zone’s history. Yields over 7% are considered unsustainable. Italy’s was just above 6%. European equity markets reversed early gains to finish flat. Declines of 3.0% and 2.9%, respectively, for Spain’s IBEX and Italy’s FTSE MIB indexes, pushed regional shares lower.

Stocks on Wall Street mostly fell, pulled down by European concerns and recent data showing a weakening US economy. Investors are awaiting a two-day meeting of Federal Reserve policymakers that starts on Tuesday for signs of new stimulus measures.

The Dow Jones industrial average was down 20.77 points, or 0.16%, at 12,746.40. The Standard and Poor’s 500 Index was down 0.34 points, or 0.03%, at 1,342.50. The Nasdaq Composite Index was up 4.62 points, or 0.16%, at 2,877.42.

The price of benchmark US 10-year notes rose 1/32 to yield 1.59%. Prices on German 10-year bonds also rose, yielding 1.41%. The euro fell about 1% to $1.2597, off a one-month high reached during Asian trading in reaction to the Greek vote. The US dollar index rose 0.3% to 81.864.

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