Markets breathed a sigh of relief yesterday following Greece’s double U-turn on its plan to hold a referendum on the bailout package and the country’s membership of the euro.
However the Greek domestic political situation will continue to cast a shadow over the G20 summit in Cannes today, as Greek prime minister George Papandreou faces a no-confidence vote in Athens.
“I cannot say that we are out of the woods – but we will hold firm [to secure Europe],” French president Nicolas Sarkozy said after the euro crisis cast a dark shadow over the Cannes summit.
Sarkozy, who also chairs the G20, said that emergency talks held in Cannes on the eve of the Summit of G20 leaders had been crucial to defuse a crisis that could potentially break up the eurozone and would have far reaching consequences.
He said that the decision of the Greek opposition to support the Brussels agreement was very important, describing Papandreou’s decision to backtrack on the referendum as “a dawning realization” and “a positive electric shock” therapy.
More fundamentally, he said, partners in the eurozone had a duty of solidarity. “There is a red line that must not be crossed. We must defend our heritage,” he said.
He added: “The explosion of the euro would cause the explosion of Europe. “We must send a message of credibility to the whole world.”
Meanwhile, markets were bolstered yesterday both by the new twist in the Greek crisis, and the quarter-point cut in interest rates by the European Central Bank to 1.25%.
Oil rose at a three-month high of $94 a barrel in New York and the euro advanced 0.5% to $1.382 against the dollar. European shares rose strongly, and Wall Street also regained some ground, with the Dow Jones index closing up 1.6%.
But Georges Ugeux, CEO of Galileo financial advisors, a New York-based investment advisory firm, said the market atmosphere was still “foggy”. “The fact [European] political leaders mention the possibility of exit from the eurozone undermines the credibility of the euro,” he said.
“People always used to say that it was irreversible. I am afraid that some European leaders may be playing with fire when they say that. It should not be so explicit.”
Meanwhile, Sarkozy endorsed the measures proposed by the Italian government, which must be submitted to a confidence vote before the Rome Senate next week.
“The issue is not really what is in the package but will this package be implemented,” he told a news conference.
Italy committed itself to balance its budget by 2013, but Italian bonds have come under renewed markets pressure this week as contagion fears continue to blur European economic prospects.
Italian 10-year bond yields rose to fresh euro-era highs yesterday, at one point touching 6.4%, before falling back to 6.18 by the end of the day.