- Posted May 7, 2012 by
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Oil Sinks Below $97 - Asian Markets Nosedive
As expected after voters in France and Greece rejected austerity measures enacted in response to the ongoing financial crises, the Asian markets went into a nosedive. Even oil per barrel sank below $97.
Earlier Sunday evening news reports indicated the possibility of negative reactions from markets around the world as France upset the incumbent conservative government and chose a socialist to lead the nation. Those reports also cast Greeks tossing out parties and going for newer more socialistic parties as also troubling.
_ How much does it matter?
A great deal. The financial mess in Greece has rocked financial markets for years. To stay afloat, Greece's government depends on loans from international creditors, and it must meet strict targets on cuts if it wants to keep receiving money. But Greek voters elevated two parties that rejected terms of the bailout. If Greek leaders refuse to stick to terms of the bailout deal, the International Monetary Fund may pull the plug on supplying funds.
"Given the degree of uncertainty that is going to enter Greek policymaking after these elections, I suspect the prospects of Greece being able to undertake serious reforms has been reduced even further," said Cornell University professor Eswar Prasad.
_ Best-case outcome: Greek parties build a governing majority that negotiates successfully with international lenders. Greece's lenders will dial back some demands for austerity to quell political unrest and allow the Greek economy to recover. Greece will continue to use the euro.
_ Worst-case outcome: Greece's new leaders are unable to find common ground with international lenders. The IMF pulls the plug on future bailouts and richer European nations refuse to step in. Greece defaults and leaves the euro currency or is expelled. There is panic among holders of bonds issued by other financially troubled countries, creating a cascade of defaults and requiring more bailouts.
_ Market outlook: It could take weeks for Greece's political parties to form a governing coalition, experts said. And the country is expected to take yet more austerity measures in June. Parliamentary developments will likely drive trading in the coming weeks, especially if investors begin to fear that a new government is unstable and the bailout program at risk.
Yet even if Greece defaults and leaves the euro, the impact on international markets might be small, said Jacob Kirkegaard, a research fellow at the Peterson Institute for International Economics. Bond investors already know that Greece is in a fiscal mess, and have marked down the value of their holdings, he noted.
"It wouldn't be without waves, but it would be a manageable situation," Kirkegaard said.
_ How much does it matter?
Experts disagree. Some say Hollande emphasized his differences with Sarkozy for political reasons, but will pursue a similar path of budget cuts once he takes power. Others believe Hollande's strong rebuke of the austerity plan could change the minds of European politicians currently focused on deep cuts to spending on social welfare programs and worker benefits.
_ Best-case outcome: Hollande teams up effectively with German Chancellor Angela Merkel, who has led the crisis response with Sarkozy. His proposal to soften austerity measures is embraced by France's parliament and bond investors, allowing France to balance its budget on a slower schedule. His view that government spending will combat the recession proves accurate, other nations follow suit and Europe returns to growth in the next couple of years.
_ Worst-case outcome: In parliamentary elections next month, French voters elevate far-left politicians. To assuage them, Hollande boosts spending sharply and rejects austerity and other reforms aimed at stabilizing France's debt load. France falls deeper into debt and faces further downgrades by credit rating agencies. Renewed fears about a French default kick off a fresh wave of crisis fears, destabilizing global markets.
_ Market outlook: Hollande's ability to reshape French and European policy hinges heavily on the upcoming parliamentary elections. Markets are unlikely to react strongly to his election until they have a clearer sense of what Hollande will be able to do, experts said. But traders will want an answer soon, said Cornell's Prasad, who studies trade policy.
"I don't think markets have the patience to string this out until summer," he said. If France's finances appear less stable, traders would have one more reason to abandon stocks and other risky investments.
As morning dawned on the other side of the world, the Asian markets did indeed beging to plunge on top of the election results in Europe.
Asian stock markets were pummeled Monday by election results in Greece and France that heightened uncertainty about Europe's ability to solve its debt crisis.
Signs of a faltering economic recovery in the U.S. compounded the dour mood while oil slid to nearly $97 a barrel.
Weekend election results in Greece sent tremors throughout Europe as voters punished the parties responsible for highly unpopular austerity measures instituted to prevent the country from defaulting on its massive debts and exiting the euro currency bloc.
No political party won enough votes to form a government, raising the possibility of new elections within months and protracted uncertainty for global markets.
Meanwhile, in France, President Nicolas Sarkozy lost to Socialist candidate Francois Hollande, who had criticized the country's austerity program and wants to boost government spending.
Energy stocks were among the hardest hit after the price of oil lost about 8 percent over three trading days.
Now investors and brokers nervously wait for the US markets to open on Monday. A continued downturn after closing down on Friday based on Labor Department figures on jobs and unemployment could cause added concern that the US economy may stall.
From the Cornfield, as interconnected as the world has become a pebble cast into a pool can ripple from ocean to ocean gathering steam like a tsunami or hurricane.