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Euro sinks to nine-year low as Greek January elections loom Greek fears push euro to nine-year low against dollar
(about 13 hours later)
The euro sunk to a nine-year low today - as new doubts arose regarding Greece’s commitment to the common currency. The euro tumbled to its lowest level against the dollar in almost a decade on Monday as fears over a Greek exit from the eurozone made an unwelcome return. Investors also bet on the European Central Bank soon starting its own programme of sovereign bond purchases in order to avert a deflationary spiral.
On Monday the euro was trading against the dollar at $1.1951 after falling to $1.1862, its lowest since December 2005. The single currency dipped as low as $1.188 in trading, its weakest level against the greenback since February 2006, although it later picked up slightly to $1.1921. The euro was helped down by weekend reports in the German media that Berlin believes the eurozone can cope with a Greek exit from the single currency should the radical left-wing Syriza party win the general election later this month.
The drop was triggered by a Der Spiegel report which cited unnamed officials who said the German Government no longer believes it would be too risky for the 19-member Eurozone if Greece dropped the currency. Greek 10-year bond yields also rose close to a 16-month highs of 9.6 per cent in trading yesterday, although they are still well short of the ruinous 30 per cent levels hit at the height of the crisis in 2012, the last time it looked as if Greece was set to crash out of the single currency.
Upcoming elections in Greece that might be won by the left-wing anti-austerity Syriza party have renewed doubts about whether the country will stick to the terms of its international bailout and stay in the euro group. Germany has warned Greece against reneging on the bailout conditions should Syriza win this month's general election. A spokeswoman for Angela Merkel’s government insisted there had been no change in the official position on Greece, but confirmed Berlin’s belief that a Greek exit would not jeopardise the single currency. “The world has obviously moved on since 2012 and in the meantime we’ve created effective measures that are in place for precisely that reason: to stabilise the eurozone,” she said.
However, German Vice-Chancellor Sigmar Gabriel said the German government wanted Greece to stay in the euro zone. Elsewhere, the French President, François Hollande, presented a firm line on Greece. “The Greeks are free to determine their own destiny,” he said in a radio interview.
Responding to the Der Spiegel report, a spokesman for German Chancellor Angela Merkel told the Associated Press there is no change in German policy and the government expects Greece to fulfil its obligations under the EU, ECB and IMF bailout. The euro has also been under pressure from expectations the ECB will expand monetary stimulus. The leader of Syriza, Alexis Tsipras, has threatened to stop co-operating with the terms of Greece’s eurozone bailout if his party forms the next government, which could result in the country’s effective expulsion from the single currency. He has also called for a restructuring of Greece’s large external debt to its eurozone partners.
"Greece could spoil the party in coming weeks as talk of a 'Greek exit' resurfaces. The past year has been hard enough for the European Central Bank as the region fought severe economic challenges and attempted to resuscitate growth," said Stan Shamu, market strategist at IG in Melbourne, Australia. Traders were also responding to an interview given at the end of last week by the president of the European Central Bank, Mario Draghi. The ECB will next meet on 22 January, with a growing number of City analysts expecting some form of quantitative easing to be announced, despite opposition from Germany.
"Investors will be monitoring polls very closely heading into the elections. Opposition party Syriza has already started being vocal, talking about a Greek debt haircut and cancelling the austerity measures and bailout package." “We see a 65 per cent chance for sovereign bond purchases and an 80 per cent chance for corporate bond purchases at one of the next two meetings on 22 January or 5 March, with 22 January the more likely date,” said Holger Schmieding of Berenberg Bank.
Meanwhile, French President Francois Hollande said on Monday that countries including Spain and Greece had paid a heavy price to stay in the euro and it was “up to the Greeks” to decide whether to now remain a part of the single currency. Inflation in the eurozone fell to just 0.3 per cent in November, well below the central bank’s official target of just below 2 per cent. And many forecasters expect inflation to turn negative in the coming months if global oil prices continue to decline. The first reading for December is due tomorrow.
"As for Greece remaining in the euro zone, Greece alone can decide," Hollande said in an interview with France Inter radio. Lena Komileva of G+ Economics said declining prices were a serious threat to monetary policymakers in Frankfurt and to all eurozone governments. “Deflation is a risk to the ECB’s credibility but it is also becoming a clear and present danger to financial and political stability, as it boosts support for the radical left [and] undermines social support for reforms,” she said.
"At this time we should not hypothesize about whether, according to the Greek vote, they would not or would still be a member of the euro zone. The Greeks are free to determine their own destiny."
Syriza leader Alexis Tsipras said in December his party would ask Europe to erase a big portion of its debt.
Hollande, whose Socialist government has criticised Germany's emphasis on budgetary discipline, said: "Europe cannot continue to be identified by austerity."
Additional reporting by agencies