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Pro-euro election results ease fears about Greece

Fears of an imminent Greek exit from Europe's joint currency receded Sunday after the conservative New Democracy party came first in a critical election, and pro-bailout parties won enough seats to form a joint government.

As central banks stood ready to intervene in case of financial turmoil, Greece held its second national election in six weeks after an inconclusive ballot May 6.

With one party advocating ripping up Greece's multibillion-euro bailout deal, the election was seen as a vote on whether Greece should stay in the 17-nation joint euro currency. A Greek exit would have had potentially catastrophic consequences for other ailing European nations, the United States and the entire global economy.

With 82.5 percent of the vote counted, official results showed New Democracy winning 30 percent and 130 of the 300 seats in Parliament. The radical anti-bailout Syriza party had 26.6 percent and 71 seats, and the pro-bailout Socialist PASOK party came in third, with 12.5 percent of the vote and 33 seats.

The result forestalled what financial analysts had most feared -- a victory for Syriza, a leftist party that wanted to cancel the terms of the bailout, speeding Greece toward an exit from the euro and the world economy toward an unpredictable shock.

But those same analysts cautioned that any surge is likely to be brief.

Neil MacKinnon, global macro strategist at the investment bank VTB Capital, told his clients that the election result, combined with a Federal Reserve meeting this week at which investors hope for measures to stimulate the U.S. economy, could lift stocks.

MacKinnon cautioned, however, that there are still too many problems in Europe, particularly in Spain, plus evidence that the global economy is cooling, to justify a celebration.

"I think investors should treat any sort of knee-jerk rally with caution," MacKinnon said in an interview.

Investors learned that lesson last week. On June 9, European countries agreed to lend Spain up to $125 billion to save its banks, but the relief lasted only hours, and the Dow Jones industrial average closed down 142 points the next trading day.

Borrowing costs for the Spanish government crept closer to 7 percent, the level economists consider unsustainable, throughout the week. They also inched higher for Italy. Those two countries are the third- and fourth-largest in the euro group.

So when stock and bond markets open around the world today, a Greek doomsday will have been avoided, but there will still be plenty for investors to fret about.

"How long is it going to take for people to worry about Spain again?" asked Peter Schiff of the brokerage Euro Pacific Capital.

For that matter, the problems of Greece itself are far from solved.

The rest of Europe will "lean over backward" to support a coalition led by New Democracy, said Douglas Elliott, a fellow in economic studies at the Brookings Institution.

Greeks overwhelmingly want to stay in the euro and avoid a return to Greece's old currency, the drachma, which would almost certainly sink in value immediately against the euro, eating into the value of savings in Greek banks.

But Greeks remain outraged by the public spending cuts demanded by European neighbors, notably Germany, in exchange for a total of $300 billion in bailout loans. Greek unemployment is almost 22 percent.

Syriza, the anti-bailout party, signaled Sunday that it wants no part of a coalition government. And while New Democracy and PASOK, another pro-bailout party, have enough seats to form one, it could disintegrate quickly.

One market strategist, Paul Christopher of Wells Fargo Advisors, said last week that a Syriza victory could have led to a 15 percent decline in the Standard & Poor's 500 index within weeks. That's because no one is sure how bad a Greek exit from the euro would be. Greece would almost certainly default on its debt, triggering losses for European banks that own its bonds.

The worst case envisions a worldwide lending freeze similar to what happened when the investment bank Lehman Brothers went under in September 2008, during the U.S. financial crisis.