Fears Greece will crash out of the euro weighed heavily on the European markets on Monday, with £28.5bn wiped off the value of London’s leading shares index.
The FTSE 100 Index closed down two per cent, or 110 points, at 5465.5 as a day of turmoil on the markets was fuelled by stuttering attempts to form a coalition government in Greece.
The country’s future in the eurozone is now in doubt and it faces the prospect of holding another election in June.
Banking shares were hit particularly hard by the uncertainty, with Royal Bank of Scotland and Barclays among the biggest fallers in London.
France’s Cac-40 and Germany’s Dax both closed down approximately two per cent.
In Greece, president Karolos Papoulias has been unable to secure a deal, while Syriza – the Radical Left Coalition party which came second in the vote – refuses to join a coalition government which supports severe austerity measures.
Greece is now in its fifth year of recession and it is likely to default on its debts and be kicked out of the euro unless it can put further austerity measures in place.
Fresh elections next month would effectively be a choice on whether to stomach more austerity measures and remain in the euro, or to exit, investors believe.
Spreadex sales trader Matthew Nelson said: “Pretty much all the market focus at present is on Greece’s attempts to form a coalition government and investors and spread bettors alike seem to be pricing in an exit for the tormented sovereign.”
The euro declined in value in the currency markets on Monday, but the pound went up in value because it is viewed as a safe haven.
UK holidaymakers heading for the continent will be pleased to hear a pound now buys 1.25 euros, but businesses that rely on exports to Europe will not be so cheerful.
On the bond markets, the UK’s status as a safe haven saw it enjoy borrowing costs at record lows on Monday, while the US and Germany enjoyed similar trends. However, Italy and Spain were seen as increasingly risky and faced increased borrowing costs.
IG Index market analyst Chris Beauchamp said: “Uncertainty is driving markets at present, with the main fear being that Greece will leave the eurozone.
“It has been a day of relatively little news but that has not stopped a widespread rout on indices, as traders abandon markets for the safety of the US dollar and government bonds.
“It seems almost certain that the Greek problem will remain the centre of attention for the rest of the week, with all other news subsumed into the general morass of worry.”
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