European Markets Rally on Rate Cut; Greek Government in Turmoil

Devan Biswas
03 Nov, 2011
New York City

Market indexes in Europe surged after the newly appointed ECB President Mario Draghi lowered key rate to 1.25%. The surprise decision lifted market indexes, banks and financial services companies. Greek turmoil reached to a new low after finance minister voiced his concern on the referendum.

[R]3:25 PM Frankfurt – Market indexes in Europe surged after the newly appointed ECB President Mario Draghi lowered key lending rate to 1.25% from 1.5%. The surprise decision lifted market indexes, banks and financial services companies. Greek turmoil reached to a new low after finance minister voiced his concern on the referendum.[/R]

European markets soared after the European Central Bank lowered its key lending rate to 1.25% from 1.5%.

At the press conference, Draghi said that second half economic estimate is expected to be lowered next month. The euro edged lower 0.1% to $1.372 and market indexes pared earlier gains by half near the close.

Inflation in the euro zone in October remained at 3%, well above the target rate just below 2%.

The surprise rate cut was announced by the newly appointed ECB President Mario Draghi as the leaders of G20 nations gather in Cannes, France.

The mood in Greece changed for worse as the divide in the Greek government deepened and more lawmakers in the governing coalition with Socialist Party ask for Prime Minister George Papandreou’s resignation.

The fast evolving situation may lead to the collapse of the Greek government as early as today and the president of Greece may be forced to appoint a caretaker government that will decide the fate of the EU bailout referendum.

Papandreou is struggling to corral his party members to support the referendum decision as lawmakers debate in the run up to the confidence vote tomorrow.

If Prime Minster Papandreou resigns the fate of referendum is not clear. Finance Minister Evangelos Venizelos and his deputy both publicly voiced their concern about the referendum and its timing.

The key question is what question Greeks will be posed to vote on. Chancellor Merkel wants the Greeks to decide if they want to be in the euro zone whereas Greek government may want to ask people what conditions the bailout should be agreed on.

Merkel said ahead of the G20 meeting that referendum is about one question only, “does Greece want to stay in the euro zone, yes or no?”

In Paris, the CAC-40 Index rose 81.90 or 2.6% to 3,192.49 and in Frankfurt the DAX Index increased 161.32 or 2.7% to 6,126.95.

The indexes in Stockholm gained 1.2%, in Madrid rose 2%, in Milan added 3.6% and in Zurich edged up 0.9%. The index in Athens added 2.1% and in UK gained 1.1%.

Greek turmoil only increased the scrutiny of the Italian Prime Minister Silvio Berlusconi and his commitment to implement austerity measures.

If Greece decides to leave the euro zone the yields on Italian and Spanish bonds are expected to surge near 7% and increase the cost of borrowing for both struggling nations.

Gainers & Losers

Deutsche Bank AG gained 4.2% to €29.88, BNP Paribas SA surged 10.7% to €32.83 and Societe Generale SA added 7.3% to €18.90.

Intesa Sao Paolo SpA increased 7 cents to €1.22 and UniCredit SpA increased 51 cents to 84.8 cents.

HSBC Holdings plc increased 4.4 pence to 545.20 pence and Barclays rose 0.9% or 192.35 pence.

BMW AG increased 3.3% to €59.90, Volkswagen AG rose 4% to €119.20 and Daimler AG added 3.9% to €36.78.