Greece’s stock market plunged 11 percent on Tuesday and bond yields spiked after the country’s government surprised investors by announcing a snap presidential vote.
The election was originally scheduled for the new year, but will now take place next week. The news, announced late Monday, caused the Athens Stock Exchange to fall 11 percent by midday on Tuesday, and the yield on Greek 10-year government debt to rise 29 basis points to 7.63 percent.
Greece’s banks were among the worst hit, with thetrading down around 15 percent, down 17 percent and down 26 percent.
On Monday, euro zone finance ministers signaled that they were in favor of granting Greece a two-month extension to its bailout program, which Athens will ask for on Tuesday.
Prime Minister Antonis Samaras brought forward the election to select a new president after failing to win backing from Brussels over his 2015 budget. The first of three rounds of voting will be held on December 17.
A failure by Samaras to get his candidate elected for president – who has yet to be announced – could trigger early elections, Reuters reported Tuesday.
Unpopular austerity policies have been implemented by the Greek government as a condition for an international aid program worth 240 billion euros ($259 billion) which began in 2010.
The government under Samaras is reluctant to impose more austerity measures, as required by its lenders, but a lack of reform progress could mean that Greece does not receive a last tranche of aid and an exit to its bailout program is delayed.
Former IMF board member Miranda Xafa said the decision to bring forward the presidential vote was “surprising”, but that it could be a strategic move by Samaras to put opposition parties – like the left-wing, anti-austerity party Syriza – in a “very awkward position”.
Syriza has said it would tear up the bailout agreement and not make a deal with the agreement with the so-called “troika” of international organizations which oversee Greece’s bailout: the European Commission, International Monetary Fund and European Central Bank.
“Yesterday, the euro group granted a short extension of the European leg of the bailout program. (But) without a program, Greece would be left without a backstop and would not be able to get a disbursement (of the last tranche of aid),” Xafa, who is currently president of Athens-based consultancy firm EF Consulting, said. “It really puts them (Syriza) into a bind.”
John Milios, an economist for Syriza and a member of parliament, told CNBC that the presidential vote was the beginning of a process that would result in early general elections.
“The government is not going to collect the two-thirds of the vote as is demanded by the constitution and we think that this is a very good moment to change policy. The majority of the people in Greece can no longer afford the extreme austerity policies,” he told CNBC”
Austerity had caused a humanitarian crisis, according to Milios, and had damaged the Greek economy. “This program cannot go on,” he said. “(We need policies) to restart the economy, to have a social program and to boost growth. We need a budget which does not create any deficits anymore.”
– By CNBC’s Holly Ellyatt, follow her on Twitter. Follow us on Twitter: