Market jittery on stalled Greece


The results of the recent French and Greek elections have cast fresh doubt over the path to financial reform in Europe.

France has a new 'pro growth' president and it is still unclear just who will govern Greece after the ruling coalition fell short of a parliamentary majority.

In both cases voters strongly backed parties in favour of unwinding previously agreed austerity (spending cuts).

Spending cuts are crucial to reducing swelling budget deficits so it's not surprising that this new uncertainty has resulted in a bout of selling on global share markets.

Many Australian investors may be asking: Just why is European politics such a big deal?

The answer is that many European countries and banks have unsustainably high debt burdens (and little prospect of repaying them) and a high level of interdependence.

So they remain at the mercy of bond markets, which set the interest rates on their debt.

That means, should a major event, such as a Greek default, lead to a sudden loss ofconfidence and materially higher interest rates, it would quickly expose the Eurozone's precarious position.

The stakes are high, so investors tend to sell shares first and ask questions later when uncertainty reigns as it did early last week.

Over the coming months, financial markets will be watching closely to see if the Europeans can reconcile their differences and come up with a credible plan (perhaps a middle-case in the austerity versus growth debate) to potentially restore stability to the region.

Following on from last week's _Countryman _ article, ANZ has followed the other major banks by cutting its standard variable home loan rate by 37 basis points (compared to the RBA's 50 basis point reduction in the cash rate) and National Australia Bank (NAB) has reported its first half profit result.

NAB's statutory profit dropped 15.5 per cent to $2.05 billion in the six months to March 2012, compared with a profit of $2.4 billion in the previous corresponding period.

The bank cited its underperforming operations in the United Kingdom as one of the reasons for the fall in profit.

However NAB's cash profit for the six months to March was $2.83 billion, up 6 per cent on the previous corresponding period's $2.67 billion and the bank increased the interim fully franked dividend from 84 cents to 90 cent a share.

·If you would like to subscribe to Adam Farrall's weekly market update, contact him at Sentinel Stockbroking on 9225 0020 or email

_Information contained in this article does not consider your personal circumstances. You should consult a stockbroking professional before making any investment decisions. Sentinel may hold positions in stocks discussed from time to time. _

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