Euro Gains as Pro-Bailout New Democracy Wins Greek Poll

By Keith Jenkins and Emma Charlton - Jun 18, 2012 6:30 AM GMT+0700

The euro strengthened as official projections showed the pro-bailout New Democracy party won the election in Greece, easing concern the country would be forced from the currency bloc.

The 17-nation euro extended last week’s 1 percent jump versus the dollar after figures from the Interior Ministry based on 95 percent of the votes showed the party led by Antonis Samaras won 29.8 percent of the vote and secured 129 seats in the 300-seat legislature. Anti-bailout party Syriza gained 26.8 percent and 71 seats, while socialist Pasok, with 12.4 percent, took 33 seats, according to partially counted returns posted on the Athens-based ministry’s website today.

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The euro has weakened 3.6 percent in the past six months, the worst performance among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. Photographer: Chris Ratcliffe/Bloomberg

“It’s broadly positive, but I think what you have to acknowledge is that a lot of Europe’s problems still remain,” said Robert Rennie, chief currency strategist at Westpac Banking Corp. (WBC) in Sydney. “There’s still a lot of unknowns in terms of the outlook for Europe. I don’t think those question marks have really changed.”

The euro appreciated 0.6 percent to $1.2713 at 8:25 a.m. in Tokyo from the close in New York last week. It fell as low as $1.2288 on June 1, the weakest level since July 2010. It jumped 1.1 percent to 100.54 yen from 99.49. The shared currency strengthened 0.5 percent to 80.86 U.K. pence, after touching 79.68, the weakest since May 16.

The dollar rose 0.4 percent to 79.08 yen. The U.S. currency slid 0.5 percent versus the Swiss franc to 94.50 centimes. It fell 0.6 percent to $1.0118 per Australian dollar.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six U.S. trading partners, fell 0.3 percent to 81.324. The gauge earlier declined to 81.161, the lowest since May 22.

Greek Ballot

While 21 parties were on the Greek ballot yesterday, the main contest was between Syriza leader Alexis Tsipras, who has promised to renege on budget cuts demanded by creditors, and New Democracy’s Samaras, who has said his challenger was risking an exit from the currency union. Greece was left with a political stalemate after the previous general election on May 6.

Since the initial vote, the euro weakened 4.8 percent against the yen and lost 3.4 percent versus the dollar through last week as investors sought havens from the turmoil. The crisis escalated on June 9 when Spain asked for a bailout of as much as 100 billion-euro ($127 billion) to prop up its banks.

Yesterday’s vote forced Greeks, in a fifth year of recession, to accept austerity or reject the bailout conditions. Leaders of the Group of 20 nations begin their annual gathering today in Los Cabos, Mexico, with French President Francois Hollande and German Chancellor Angela Merkel opting not to leave for the event until after the outcome in Greece is known.

Bailout Adjustments

European governments indicated a willingness to adjust the terms of Greece’s bailout package as long as a new government “swiftly” emerges from the election.

“There’s no time to lose or leeway for small party games,” Samaras said yesterday after placing first in the vote that will force him to rule with the third-place socialist Pasok party. “The country must be governed.”

Greece’s international monitors will “return to Athens as soon as a new government is in place to exchange views with the new government on the way forward,” euro-area finance ministers said in an e-mailed statement following the vote. The ministers sought “the swift formation of a new Greek government that will take ownership of the adjustment program.”

Above Average

Through most of the financial and political turmoil in Europe, the euro has held above its lifetime average of about $1.21 as investors put their faith in Merkel to keep the monetary union in place.

“The euro has been trading above $1.27 on the back on a possible coalition on the right side of austerity measures,” said Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank Ltd. in London. “If New Democracy get enough to form a coalition they’ll stick to the mandate and maintain the euro which will be a big relief to markets around the world.”

While forecasting little change in the euro versus the dollar, a majority of the world’s biggest foreign-exchange trading firms surveyed last month by Bloomberg News said the loss of a member such as Greece would risk more departures and send the currency lower.

The median year-end estimate for the euro is $1.25, according to more than 50 analyst estimates compiled by Bloomberg. The forecast has come down from $1.30 as recently as May 18.

Reduced Bets

Hedge funds and other large speculators reduced trades that would profit from a drop in the euro against the dollar last week from a record the week before, figures released on June 15 by the Washington-based Commodity Futures Trading Commission showed.

The difference in the number of wagers on a drop in the euro against the greenback versus those on an advance was 195,187 contracts on June 12, from 214,418, the data showed.

The premium for three-month options granting the right to sell the euro against the dollar relative to those allowing for purchases was 2.83 percentage points at the end of last week, up from a low this year of 1.41 percentage points in March. The so- called risk reversal rate has eased from 3.47 percentage points last month.

The implied volatility for one-month euro-dollar options, which indicates expected swings in the underlying currencies, reached a high of 13.29 percent last week. While that’s up from 8.25 percent in April, it’s below last year’s peak of 18.42 in September. The JPMorgan G7 Volatility Index rose to 11.88 this month from 8.84 in April, the least since November 2007.

Smaller Union

The most probable outcome is the euro will evolve into a smaller union, including France, Germany, Italy and Spain, and underpinned by stronger coordination and financing, Pacific Investment Management Co. Chief Executive Officer Mohamed El- Erian wrote in a May 15 report outlining the Newport Beach, California-based company’s medium-term economic outlook.

Rather than a euro failure, an orderly Greek exit from the currency has Nobel laureate Joseph Stiglitz predicting a stronger and more stable monetary union.

“If you can weather the storm and haven’t put your bets too short term, probably the euro is going to go up,” Stiglitz, a professor at Columbia University and winner of the 2001 Nobel Prize in economics, said in a June 4 interview at Bloomberg’s New York headquarters. “It’s likely there will survive some rump version,” centered on Germany, he said. If it includes countries such as France, the “euro would likely appreciate.”

Merkel, Sarkozy

The euro is down from this year’s high of $1.3487 on Feb. 24, and has depreciated about 6.1 percent during the past year against a basket of nine developed-market peers, according to Bloomberg Correlation-Weighted Indexes.

For much of the crisis, speculating on a weaker euro meant betting against the ability of Merkel and then-French President Nicolas Sarkozy to keep the currency union together. They said in a September statement that “it is more than ever indispensable” to “assure the stability of the euro zone.”

Sarkozy since became the first French president in 30 years to fail to win re-election. The standing of Hollande’s Socialist Party was further bolstered following yesterday’s parliamentary election in France. The party and its allies won an absolute majority in the National Assembly, exit polls showed, paving the way for them to pass legislation without the aid of other members of parliament.

In Germany, Merkel’s Christian Democratic Union had its worst-ever result in an election last month in the country’s most populous state.

Greek Debt

Of Greece’s 266 billion euros of debt, about 194 billion euros, or 73 percent, is held by the European Central Bank, euro-area governments and the IMF, according to the Greek debt management office in Athens. In 2010, before the first bailout, Greece owed about 310 billion euros, all to the private sector.

Greece completed the largest bond restructuring in history in March, as holders forgave more than 100 billion euros on their government securities.

Since then, Greek bonds issued under the terms of the deal have slumped. The 2 percent note due February 2023 was at 16.42 percent of face value on June 15, down from 28.68 percent on March 15. The bonds yielded 27.13 percent last week.

German two-year yields turned negative for the first time on June 1, meaning investors were paying for the safety of holding the region’s safest assets, while 10-year rates touched an all-time low of 1.127 percent the same day.

“If these polls prove to be accurate and New Democracy can form a coalition, then there is some scope for a relief rally,” said Simon Smith, chief economist at foreign-exchange broker FXPro Group Ltd. in London. “There’s so much uncertainty about whether a viable coalition will be formed that the market will still be skeptical. It’s still a long road for Greece. We are bearish euro.”

To contact the reporters on this story: Keith Jenkins in London at kjenkins3@bloomberg.net; Emma Charlton in London at echarlton1@bloomberg.net

To contact the editors responsible for this story: Daniel Tilles at dtilles@bloomberg.net; Rocky Swift at rswift5@bloomberg.net