LONDON: Greek bond yields shot higher on Monday after the government's candidate for president failed to win enough votes from lawmakers in a final round of voting, paving the way for national elections early next year.
Investors took fright at the prospect of the leftist Syriza party -- which has vowed to write off much of Greece's debt, renegotiate its EU/IMF bailout and roll back austerity policies -- coming to power in an election slated for Jan. 25.
Yields on 10-year bonds rose to 9.7 percent, up around 117 basis points on the day, while three-year yields were up 163 bps at 11.89 percent.
The Athens composite equity index tumbled more than 11 percent before paring some losses to trade down 7.4 percent and at its lowest levels since mid-2013.
"The uncertainty is raising concerns for investors," said Manos Hatzidakis, an analyst at Beta Securities in Athens.
"Psychology has taken the lead, and when psychology takes the lead valuations and fundamentals fade in the background."
The sell-off in Greece spilled over to other low-rated euro zone government debt, while investors sought refuge in safe-haven German bonds.
Italian and Spanish 10-year yields hit day-highs of 2.03 and 1.73 percent shortly after the vote, while German equivalents fell to a record low of 0.564 percent.
Some analysts fear a victory for Syriza in Greece could bolster challenges from populist parties elsewhere. In Spain, the anti-establishment Podemos party has already split the country's two-party system as elections approach next year.
"What I see from this is more a medium-term political risk for the euro zone," said Norbert Wuthe, rates strategist at Bayerische Landesbank.
But others remain confident that problems in Athens can be contained, avoiding another euro zone meltdown like that triggered by states' indebtedness following the global financial crisis and which peaked in 2012.
"A Greek accident has become a potent risk, but mostly for Greece itself. The euro zone now has a well-oiled machinery to deal with crises," said Berenberg economist Holger Schmieding, citing expectations the European Central Bank will begin buying government bonds next year in a bid to combat deflation risks.
Schmieding gave a 55 percent probability that Syriza will win the snap election. Greek Prime Minister Antonis Samaras will ask President Karolos Papoulias on Tuesday to propose the dissolution of parliament and set an election date of Jan. 25.
Shortly after the vote, Finnish Prime Minister Alexander Stubb tweeted that it was "necessary for the new (Greek) gvt to continue reforms". That echoed earlier comments by German Finance Minister Wolfgang Schaeuble that any new government in Athens would have to respect austerity pledges.
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