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The morning after: Greece still in crisis, Spain not far behind

These are stories Report on Business is following Monday, June 18, 2012.

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The morning after
Come Monday … Greece remains in crisis, and Spain's not far behind.

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There was a short-lived rally in Asian markets today after the victory of the pro-austerity forces in the Greek election, one that allows them to try to form a coalition government. That's what happened in the last election, in May, but no government could be formed, resulting in Sunday's second vote.

Combined, the New Democracy and Pasok parties hold 162 seats, enough to strike a majority well ahead of the rival Syriza, the anti-austerity group with 71 seats.

"It was certainly a relief that our worst fears were not realized as the pro-bailout parties managed to clinch the majority," said senior economist Jennifer Lee of BMO Nesbitt Burns.

"But it is certainly not a unified leadership as the Pasok has yet to figure out how they will throw their support behind a coalition government (no ministers, just a vote of confidence?)," she added. "And the Syriza may have lost the battle but the war will rage on ('we will continue the fight') as they still took a hefty share of the vote, putting them in second place."

While this time may be different that the failed attempts to form a coalition in May, market sentiment soon fell flat after the initial results. At best, it's buying time. Worse still, Spanish bond yields shot well above the key 7-per-cent level that forced other governments into bailouts.

"This vote still leaves the Greek economy in crisis, and Spain's not far behind it," warned Kit Juckes and Sébastien Galy of Société Générale.

Expect turmoil going forward.

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This is not going to be easy and should weigh on risk through the week ahead - there may be points in the next few days where the market will doubt if a government is possible," said senior currency strategist Elsa Lignos of RBC in London. "We stick to the view that a government will be formed, as the incentive to push for new elections is much lower for everyone."

The short rally is exactly what happened one week ago, when a rally over a bank bailout for Spain fizzled after just a few hours as investors questioned just what that would mean and speculated that the Spanish government may still require a bailout. Like a week ago, too many questions remain.

"For the second week in succession, euphoria over apparent progress in the euro zone has lasted for only a few hours," said market analyst Chris Beauchamp of IG Index.

"Last night's Greek election saw the pro-bailout New Democracy party edge just ahead of its anti-bailout Syriza rival, meaning that, at least for the moment, Greece is no longer headed straight for an exit from the euro zone," Mr. Beachamp said in a research note today.

"However, this isn't the beginning of the end for Greece, in fact it probably isn't even (to paraphrase Churchill) the end of the beginning. New Democracy will now try to patch together a ruling coalition, although any government will be shaky at best, and while the Germans have hinted at an extension of time lengths for Greek austerity efforts, they are  sticking to their guns on the severity of the measures needed."

So while Asian stocks surged on the results, the markets fast lost steam.

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"In summary, we are really no further along than last Friday, and markets have reflected this; last week's relief rally lasted barely a day, this one has been even briefer," said Mr. Beauchamp.

What's most likely is that today's results are a small mercy, and only for now. The market reaction would probably have been severe had the Syriza camp, which wants to tear up the harsh provisions attached to the Greek bailout, come out on top.

"Economic reality can't be ignored - years of pain lie ahead whatever happens," said Mr. Juckes, the chief of foreign exchange at Société Générale.

"If your cup is half-empty by inclination, you will see this all as a fool's bounce. Investors had no choice but to position for the worst outcome, because that was the one which would cause the bigger move. Reducing tail-risk is what investment is about these days."

Greece desperately needs to get a coalition in place.

Until it does, noted senior economist Martin Schwerdtfeger of Toronto-Dominion Bank, the so-called troika of the European Union, the International Monetary Fund and the European Central Bank won't send its next mission to Athens.

"Getting the first review of the second bailout under way is critical for Greece as the country could run out of cash shortly," he said.

"If New Democracy manages to form a government this week, discussions with the troika could be resumed next week," Mr. Schwerdtfeger added in a research note.

"European officials have signaled some willingness to make some adjustments to the current program to give Greece more breathing room. These could include extending the periods of adjustment, relax some of the targets, reduce interest rates on the loans, and extend funding for infrastructure projects via the European Investment Bank. All these elements will be part of the negotiations in the coming weeks."

Where does it all end?

I lean toward Mr. Schwerdtfeger's view, that it will be difficult for a coalition to do what's necessary and that "in all, we believe Greece will have to restructure its debt once again and that the country will eventually leave the euro zone."

Yamana to acquire Extorre
Yamana Gold Inc. is having a busy day, boosting its dividend and announcing the acquisition of a miner with interests in Argentina.

The Toronto-listed miner, with interests across Latin America, hiked its dividend by 4 cents to 26 cents, marking the fourth hike in its payout in the last year.

Yamana also struck a cash-and-stock deal for Extorre Gold Mines Ltd., worth about $400-million.

Extorre boasts the Cerro Moro gold and silver project in Argentina's Santa Cruz province.

"It is a relatively small transaction in that it represents only 3 per cent of Yamana's market capitalization yet it could ultimately deliver more than 10 per cent of our total gold equivalent production," said chief executive officer Peter Marrone.

"It is rare to find such a small transaction that could contribute meaningfully to increases in net asset value, production and cash flow In our view, it is one of the best undeveloped, high-grade opportunities in the Americas."

Celestica pulls back from RIM
Celestica Inc., one of Research In Motion Ltd.'s long-time original suppliers, is winding down production of RIM's signature BlackBerry smartphones over the next three to six months, The Globe and Mail's Iain Marlow reports.

The Toronto-based global manufacturer, which operates several facilities in China, received nearly 20 per cent of all revenues from its services to RIM in the first quarter, down from about 21 per cent in the same quarter last year.

RIM, which has struggled with slowing sales over the past year, has been attempting to streamline aspects of its operations, reevaluating supplier relationships and large parts of its global workforce.

Celestica, which brought in first quarter revenues of $1.69-billion (U.S.), said restructuring charges related to the loss of RIM's contracts will not exceed $35-million.

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About the Author
Report on Business News Editor

Michael Babad is a Report on Business editor and co-author of three business books. He has been with Report on Business for several years, and has also been a reporter and editor at The Toronto Star, The Financial Post and United Press International. His articles have appeared in major newspapers around the world. More


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