FTSE 'Cautious' As Eurozone Crisis Returns

Traders in London reacted cautiously to the weekend election results from France and Greece following a roller-coaster ride on the European markets yesterday.

On opening after the long bank-holiday weekend, the FTSE 100 index dipped by 0.1% before edging back to trade up by 0.1%.

Political uncertainty returned to the eurozone after socialist Francois Hollande beat current president Nicolas Sarkozy in the French presidential election, and the general election in Greek failed to produce an outright winner.

As both results indicated a public and political sea change against austerity, the eurozone sovereign debt crisis entered a new chapter - sending markets within the single currency bloc into chaos.

The stock market in Athens fell by 7% yesterday after mainstream parties fell short of a governing majority in Sunday's election, putting at risk hard-won agreements to save the country's economy and eurozone membership.

The crisis-hit nation could now face another round of elections next month unless the leader of the left-wing Syriza bloc can bring together the parties who campaigned on an anti-austerity message.

Ideological differences between the parties look set to complicate the task and any rejection of the previous government's cuts and the international bailout deal is likely to cause serious political and financial instability.

In the wake of the elections, German Chancellor Angela Merkel, the chief proponent of austerity as the main way out of the eurozone crisis, said it was "of utmost importance" that Greece sticks to its reform path.

She has ruled out re-negotiating the eurozone fiscal compact despite an election pledge from France's Mr Hollande for a new EU deal that focuses on growth.  

At the start of trading on Tuesday, Europe's main stock markets fell, with investor focus stuck firmly on the fallout from the weekend elections.

Meanwhile, the crisis in Spain took a turn for the worse when the Spanish government said it was a planning a bailout of the country's third biggest bank, Bankia.

Bankia is considered to be among the worst hit by the collapse of Spain's real estate in 2008, with more than 30bn euros in toxic assets.

Banks were saddled with enormous amounts of bad loans as unemployment rose and people could not pay their mortgages following the burst in its real estate bubble.

Spain's government, which is currently implementing tough austerity measures in an attempt to put the country's finances back on track, had previously said it would not inject public money into banking sector.

But the Spanish prime minister said such measures could not now be ruled out in order to salvage its balance sheet, with plans likely to be confirmed at the end of the week.

Bankia's executive chairman and former managing director of the IMF, Rodrigo Rato, resigned from the bank shortly after the state-bailout was announced.

Along with Greece, Spain is at the centre of Europe's debt crisis with investors concerned about its ability to push through austerity measures and reforms at a time of recession and with unemployment above 24%.