Global Financial Crisis II

Fears that the Greek debt crisis could drag down the world economy

More market turmoil looms
PHILIP WEN
May 10, 2010

AFTER a horror week during which $90 billion was wiped off the Australian sharemarket, investors are bracing themselves for more financial market turmoil over the mounting debt crisis in Europe.

Australian stocks fell 7 per cent last week, the worst weekly loss since November 2008. And the worst may not be over, with the SPI futures index pointing to further losses today, following more losses across all major global indices.

With markets worldwide taking a battering, European leaders have scrambled into action as fears intensify that the spread of the region's debt woes could pitch the world back into a recession.

''The problem now is contagion risk and where will it stop,'' said credit markets expert Philip Bayley, of ADCM Services. ''The markets fear that we are now entering the second leg of the global financial crisis - GFC II.''

Fears that a debt default by Greece could paralyse the world's financial system - just as the collapse of Lehman Brothers did two years ago - sparked another wave of heavy selling on European and US markets on Friday.

Treasurer Wayne Swan said Australia was better placed than any other advanced economy to deal with any global slowdown caused by the sovereign debt crisis in Greece. Mr Swan will hand down his third budget tomorrow.

His comments followed the Reserve Bank of Australia last week cautioning that the economy could be buffeted by global fallout.

The market plunge could have serious ripple effects through its impact on confidence.

Some of the nation's major banks were believed to be looking over the weekend at measures to keep holdings of liquid assets topped up given increased risk on European credit markets.

Even home buyers appeared to be responding to global jitters. Melbourne's property market recorded its second lowest auction clearance rate so far this year, the figure dropping to 78 per cent on the weekend.

REIV chief executive Enzo Raimondo said the six rate rises, affordability concerns and the unseasonably high stock levels were all having an impact on demand. On Friday, euro zone governments approved the $A160 billion Greek bailout package, in a last-ditch effort to keep the nation afloat.

But markets were unconvinced. The Dow Jones shrugged off stronger than expected US jobs data to close 1.3 per cent lower.

In Britain, shares fell 2.6 per cent - a result exacerbated by uncertainty over the British general election.

The cost of protecting European bank debt against default has reached levels not seen since the height of the global financial crisis. Bond yields soared in Portugal and Spain, while the failure to constrain the debt crisis led to the euro plunging 4.3 per cent last week. Portugal, Ireland, Italy, Greece and Spain collectively owe $US3.9 trillion ($A4.39 trillion) to other countries.

Apart from Australian banks' $A56.4 billion in exposure to Europe at the end of December, most analysts say the economy has few other direct links to the troubled region.

US President Barack Obama admitted he was ''very concerned'' about the debt crisis. Understandably so, given the extreme volatility in US markets last week, including an extraordinary 10 per cent intra-day plunge on Thursday. The Dow Jones index retreated 6.4 per cent last week, the heaviest decline since March 2009. Wall Street's so-called ''fear gauge'', the CBOE volatility index, jumped 25 per cent in the same period.

ADCM's Mr Bayley said markets were pointing to a Greek debt default as an ''all but foregone conclusion'', with the rescue package likely to have little impact.

With NATALIE PUCHALSKI

Source: The Age

http://www.smh.com.au/business/more-market-turmoil-looms-20100509-ulse.html