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Political Instability Fuels Greek Euro-Exit Talk and Bailout Aid Uncertainty

By Tzu-Wen Chen
09 May 2012 19:37 GMT

THE TAKEAWAY: [Political instability in Greece threatens exit from euro zone and risk to bailout payments] > [Greece likely to default in coming months without bailout aid] > [EURUSD plunges]

The spotlight turned back to Greece this week amid renewed speculation that the troubled nation may leave the 17-nation euro zone. The election held over the weekend resulted in a deadlock, with political parties in Greece struggling to form a new government and Greek voters revolting against the stiff austerity measures imposed under the conditions of the second bailout, worth 130 billion euros, that was approved in March.

Alexis Tsipras, head of the runner-up Syriza coalition, demanded that Greek political parties renounce their support of the reforms and called for a renegotiation of the bailout terms. These latest calls have prompted Eurozone leaders to harden their stance towards Greece and warn that the country could risk aid payments if spending reforms are not adhered to. German Foreign Minister Guido Westerwelle said, “If Greece ends the reform process it has undertaken, then I can’t see that the respective tranches [of aid] can be paid out”. Weighing in on the discussions, German Finance Minister Wolfgang Schaeuble said that if Greece ultimately decides to leave the euro zone, there would be no way that other EU members could make it remain.

The European Commission confirmed today that it plans to pay the next disbursement of aid to Greece on May 10, but that further payments will depend on the political situation in Greece. 4.2 billion euro will be disbursed on May 10, while the remaining 1 billion euro of the planned 5.2 billion euro payment will be withheld in the interim. Without the bailout assistance, it is very likely that Greece will default on its debts in the coming months.

EURUSD 1-day Chart: May 9, 2012

Political_Instability_Fuels_Greek_Euro-Exit_Talk_and_Bailout_Aid_Uncertainty___body_Picture_2.png, Political Instability Fuels Greek Euro-Exit Talk and Bailout Aid Uncertainty

Chart created using Strategy Trader – Prepared by Tzu-Wen Chen

The euro fell for the eighth consecutive day against the U.S. dollar amid growing uncertainty in the euro zone. The EURUSD pair plunged to its lowest level since January 23, dipping as low as $1.2910 during the U.S. trading session today.

--- Written by Tzu-Wen Chen, DailyFX Research

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09 May 2012 19:37 GMT