Europe’s debt crisis knocks global markets

The sell-off in global markets has accelerated amid fears that the eurozone debt crisis will worsen and that China’s recovery is faltering. From Hong Kong to New York, there was mounting concern that the €110bn international rescue package for Greece would not prevent the crisis spreading from Athens to other highly indebted eurozone nations. The MSCI Asia Pacific index of markets excluding Japan dropped 1.6 per cent to 411.43 on Wednesday, with Hong Kong’s Hang Seng and Sydney’s S&P/ASX 200 falling by similar margins. The Tokyo market was closed for a holiday. Taiwan and Indonesia were the worst hit in the region, with both down around 3 per cent. The Shanghai Composite recovered slightly by midday from as much as 2 per cent down but was still trading at a seven-month low. New curbs on property investment had led to foreign investors short-selling Chinese stocks through a renminbi-denominated exchange-traded fund at the highest rate in more than two years, Bloomberg reported.

Are ratings agencies credit worthy?

There were also reports on Wednesday that a number of Asian companies were changing their fundraising plans amid turbulent market conditions. Industrial and Commercial Bank of China and Bank of China were likely to cancel their plans to sell new shares and convertible bonds in Hong Kong and Shanghai and offer rights issues to existing shareholders instead, the 21st Century Business Herald quoted unidentified bankers as saying. New Century, a Chinese shipbuilder, said it had withdrawn its S$666m initial public offering in Singapore and Bloomberg said India’s Essar Steel was scrapping a planned US dollar bond sale. On Tuesday, its sister company Essar Energy suffered the worst debut of a large London listing in almost eight years when its shares fell more than 7 per cent. Overnight, the euro dropped to a one-year low against the dollar, European shares plumbed two-month lows on Tuesday and the bond markets of weaker eurozone economies fell as rattled investors sold risky assets.

China banks raise reserves to cool economy

Nick Chamie, a strategist at RBC Capital Markets, said: “This is a big sell-off and it is not just in Europe. It is across the globe and in almost all asset classes.” The bond markets of Greece, Spain and Portugal, which have been at the centre of the crisis, suffered the biggest falls, reflecting nervousness that the debt of these countries may need to be restructured despite agreed emergency loans for Athens. The S&P 500 dropped 2.4 per cent in New York, the FTSE Eurofirst 300 index earlier closed down 3 per cent and London’s FTSE 100 fell 2.6 per cent. Greece said it was unlikely to return to capital markets before next year and would use funds from its rescue package to finance debt in the meantime. George Papaconstantinou, finance minister, said: “The whole idea of the programme is to shield you, but [also] help you return to markets as soon as possible, so we’re hoping that next year we’ll be doing that.”

Greeks protest against austerity measures

However, the Vix index, a gauge of expected equity market volatility, spiked to its highest levels in 11 weeks amid market talk that Spain was seeking loans from the International Monetary Fund because of its deteriorating public finances. José Luis Rodríguez Zapatero, Spanish prime minister, angrily dismissed suggestions that Spain was negotiating a €280bn bail-out with the IMF as “complete insanity”. Speaking in Brussels, Mr Zapatero said it was “simply intolerable” that such rumours were damaging Spain’s interests and could increase the cost to the state of raising money through bond issues. The IMF, denying bail-out talks, said its staff would arrive in Spain this month for a scheduled annual review of the economy. There was speculation, too, that the European Central Bank could buy eurozone government bonds to try to shore up confidence in the single currency area. The ECB declined to comment. The dollar benefited from the turmoil as the euro slipped 1.3 per cent towards $1.30, a level last seen in April 2009. On a trade-weighted basis the dollar was up more than 1 per cent and trading at its highest level in a year. The European Union’s top financial services regulator, Michel Barnier, said he would look at establishing a new European credit rating agency as he voiced frustration over the way in which Greek debt had been dealt with by some ratings agencies in recent days.

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