Greek bailout sends FTSE soaring - despite political wrangles

All this political uncertainty doesn't seem to be spooking investors: UK shares are up, as is the pound against the dollar...

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Last Updated: 31 Aug 2010

Given the continued paralysis in the UK’s corridors of power – it’s the fourth day since the Election, and there’s still no concrete news on a mooted deal between the Tories and the Lib Dems – you might have expected a big sell-off of the pound today, as investors fretted about the consequences for the economy. However, it’s actually up against the dollar, while the FTSE 100 index has jumped 5% in a single morning. Admittedly this is largely due to the latest Greek bailout package – finance ministers have just agreed a €500bn loan guarantee scheme, in a bid to stop the contagion spreading any further. But it may also suggest that the markets aren’t too worried about the UK – or at least, no more worried than they were already...

The big banks were the biggest winners on the FTSE this morning; the new bailout package means there’s less chance of them losing money in Greece, and this sent all their share prices up by more than 10%. All told, the FTSE 100 is currently up nearly 270 points today, more than 5%. The pound also rose by a cent against the dollar; since the UK has resolutely refused to get involved in the bailout, perhaps it's suddenly looking more attractive (though the euro recovered against both the pound and the dollar today, now the eurozone countries have finally put their money where their mouth is).

One possible argument is that the acres of newsprint expended on the UK political situation since Friday have given us an exaggerated sense of how bad the situation is here. We can well believe that on the Continent, for example, where coalition governments and power-sharing deals are fairly common, the level of hand-wringing here in the UK at the moment probably seems a bit strange.

But that’s only true to some extent. All this Con-Lib/ Lib-Lab wrangling surely represents a huge threat to our future economic health – because every minute the politicians spend haggling (or even, in a worst case scenario, fighting another General Election) is a minute they haven’t spent thinking about how to sort out the public finances. What’s more, a weak minority Government – or, for that matter, a weak coalition Government – will make it devilishly hard for anyone to take the tough decisions required to get the UK back on track.

On the other hand, this scenario didn’t come as a complete surprise; investors have been able to see this coming for a while now, so to some extent they’ve already priced in the risk. And it's also possible that the markets don't see a coalition as a bad thing; delays are obviously bad, but the broader the eventual 'consensus', the easier it will be to start making those cuts...


In today's bulletin:

Greek bailout sends FTSE soaring - despite political wrangles
Bungling OFT left red-faced as BA price-fixing trial collapses
Harrods to go global as Al-Fayed cashes in his chips
Stress: PwC not buying that for Tenner
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