Stocks slid again on Tuesday as Europe struggled to contain a debt crisis in Greece that is threatening to plunge the continent back into recession and wipe out the earnings of some of its biggest banks.
With France and Belgium battling to save Franco-Belgian bank Dexia and Deutsche Bank warning that profits will be lower than expected, the shockwaves from Europe’s failure to deal with Greece’s debts once and for all are being felt far and wide.
The hope in the markets was that debt inspectors would soon authorise the payment of the next tranche of bailout cash for Greece, which has indicated it needed money by the middle of next month to pay salaries and pensions.
That at least could have put a temporary stop to concerns that Greece is heading for an imminent default on its debts.
Instead, eurozone finance ministers delayed the decision until November, saying on Monday in a meeting in Luxembourg that Greece has enough to tide it over until then. And with mounting talk that a second Greek bailout, first agreed in principle in July, may be revised to get Europe’s banks to take more of the bailout pain, uncertainty stalked markets.
After falling to a near 2011 low of $1.3162 on Monday, the euro was trading 0.2% higher at $1.32.
“The delays to the Greek loan disbursement are likely to unsettle financial markets and increase the probability of a disorderly Greek debt default,” said Neil MacKinnon, global macro strategist at VTB Capital. “The apparent lack of an urgent, cohesive ‘master plan’ to resolve the eurozone debt and banking crisis can only increase market volatility and uncertainty.”
Greece crisis and its far-reaching implications
In Europe, Germany’s DAX was down 3.8% at 5 175 while the CAC-40 in France fell 3.3% to 2 828. The FTSE 100 index of leading British shares fell 3.3% to 4 909.
Shares in Franco-Belgian bank Dexia bore the brunt of the selling in Europe as investors grew increasingly concerned about its survival in its current form despite government promises to prop up the bank and insure every cent of its deposits.
With the markets bracing for a Greek debt default soon, investors are concerned about what bonds Europe’s banks are holding and banks themselves have become reluctant to lend to one another.
In Brussels, Dexia’s share price was down over 18%, prompting France and Belgium to voice their support for the bank as it tries to engineer a way out of its current crisis.
“Dexia’s problems stress the point that for eurozone leaders the Greek crisis is less about Greece and more about the potential for it to spark a much more widespread banking and economic disaster,” said Jane Foley, an analyst at Rabobank International.
Dexia’s was not the only European bank in retreat on Tuesday. Deutsche Bank was down around 7% after warning that profits in its corporate banking and securities division will come in “significantly lower than expected” and more writedowns on its Greek debt holdings.
The mood hasn’t got any better at the US open — the Dow Jones industrial average was down 1.7% at 10,496 while the broader Standard & Poor’s 500 futures fell 1.5% to 1 082.
US debt crisis
Aside from developments surrounding Greece, traders will look for clues as to the state of the world’s largest economy later on Tuesday, when US Federal Reserve chairperson Ben Bernanke testifies before the Joint Economic Committee in Washington.
Concerns over the state of the US economic recovery has also triggered the turmoil in financial markets in recent months, but recent economic data, including Monday’s manufacturing survey from the Institute for Supply Management has surprised to the upside.
A raft of US economic data this week will culminates with Friday’s nonfarm payrolls report for September. The figures often set the tone in markets for a week or two and another weak number could reinforce concerns over the world’s largest economy.
Earlier in Asia, Japan’s Nikkei 225 fell 1.1% to close at 8 456.12. South Korea’s Kospi plunged 3.6% to 1 706.19 after being closed on Monday for a holiday, and Hong Kong’s Hang Seng sank 3.4% to 16 250.27.
Markets in mainland China were closed for a holiday
Meanwhile, the price of oil continued its descent. Benchmark crude for November delivery was down $1.84 to $75.77 per barrel in electronic trading on the New York Mercantile Exchange. — Sapa-AP