World markets panic over eurozone

Friday, May 14, 2010
By Paul Martin

Investor panic hit markets worldwide as fears grew that austerity measures facing troubled eurozone countries would derail recovery and spark social unrest.

By Angela Monaghan
14 May 2010

Leading yesterday’s falls was the Spanish IBEX 35 Index, which closed down almost 7pc at 9314.70. The euro tumbled 1.5 cents against the dollar, dropping to a 19-month low of $1.2358 in US trading.

The sharp drop was a clear signal that the confidence provided by a $1 trillion (£685bn) eurozone rescue package has vanished amid deep concerns over the situation in Greece, Portugal and Spain, and the stability of the region as a whole.

Markets were jittery all day but an accelerated sell-off began in late trading following strongly worded comments from Axel Weber, a senior policymaker at the European Central Bank and head of Germany’s Bundesbank.

“It is important not to underestimate the dangers to financial stability that still exist,” he said in a speech in Rio de Janeiro. “The focus of markets has shifted in recent months towards concerns about the situation of public finances in a number of countries across the globe.”

The FTSE 100 did not escape the panic yesterday, closing down 3.1pc at 5262.85. The French CAC 40 fell 4.6pc to 3560.36, while the German DAX was down 3.1pc at 6056.71. The US Dow Jones fell 1.51pc to 10620.16.

The moves underlined the fragility of the eurozone rescue package agreed by finance ministers in the early hours of Monday in attempt to stamp out the contagion fears triggered by the Greek debt crisis. The deal was welcomed at the time with a huge sense of relief among investors, but that gave way as the week progressed to doubts about how the scheme would work in reality.

Angela Merkel, the German Chancellor, conceded yesterday that Europe remained in a “very, very serious situation”. Investors were further set on edge by reports that Nicolas Sarkozy, the French President, had threatened to pull his country out of the single currency if other eurozone nations did not agree a deal to bail out Greece at a summit in Brussels last week.

“Sarkozy went as far as banging his fist on the table and threatening to leave the euro. That obliged Angela Merkel to bend and reach an agreement,” according to a source cited by the Spanish newspaper El País. Germany denied the report, claiming it was “without any basis”.

Greece, Portugal and Spain have been forced to agree tough austerity measures to address the debt crisis which began in Greece but has since spread. It has raised fears that growth in the eurozone will be restricted as the policies are put in place.

There were also fears that violent clashes in Greece – which has been shaken by two bombs blasts in two days – were just the tip of the iceberg and could lead to more widespread social unrest as tough measures are imposed.

Yesterday marked the end of a roller-coaster week for world markets, which have been extremely volatile as investors reacted to events in the eurozone. Over the week as a whole, markets were actually up. The IBEX 35 and FTSE 100 both closed up almost 3pc on the week, while the DAX rose 6pc on the week, and the CAC 40 was up 5pc.

The weekly gains were down to the sharp rises in stock markets on Monday, following news of the $1 trillion rescue agreement.

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