GLOBAL MARKETS endured a torrid day yesterday as anxiety intensified about the euro zone debt crisis and a warning from the US Federal Reserve about the worsening outlook for the US economy spooked investors.
Amid growing worries that a new global recession could be in prospect, the European Central Bank issued research saying the tumult in the euro zone could put the single currency at risk.
Even as EU economics commissioner Olli Rehn said the authorities would not allow an uncontrolled default on Greek debt, US treasury secretary Timothy Geithner predicted “years and years” of difficulty for Europe’s weakest economies.
The Dow Jones index briefly traded down by 4 per cent yesterday and European shares fell to their lowest level for more than two years. The renewed wave of selling came in spite of the Fed’s “Operation Twist” attempt to stimulate the US economy and its housing market by lowering long-term interest rates.
Some €200 billion was wiped off the value of the top 300 European shares as the London market lost 4.67 per cent, the German market lost 4.9 per cent and the French market lost 5.2 per cent.
The strain weighed on big banks in France, which have a heavy exposure to Greece, and in Britain.
The largest French lender, BNP Paribas, saw its shares drop 5.7 per cent and the second-largest, Société Générale, dropped more than 15 per cent to its lowest level since 1992. Lloyds Bank, the biggest British mortgage lender, lost 10 per cent and Barclays lost 9.4 per cent.
The warning from the ECB about the threat to the euro was co-authored by outgoing executive board member Jürgen Stark, whose resignation a fortnight ago exposed divisions over the bank’s bond-buying campaign.
The study, published by the ECB but not endorsed by it, said euro countries should have their deficits approved at European level and face automatic fines if they breach guidelines.
“Greatly increased fiscal imbalances in the euro area as a whole and the dire situation in individual member countries risk undermining stability, growth and employment, as well as the sustainability of economic and monetary union itself,” it said.
Mr Rehn, who is pressing for more details from Athens about its new austerity plan, said the ECB’s emergency bond-buying initiative would gradually transfer to the European Financial Stability Facility bailout fund. The two bodies would work in parallel before the EFSF took over sole responsibility for such interventions.
He also said Europe would not allow Greece to leave the euro zone because of the disruption that would cause in Europe and the world. “We will not let that happen,” he said in Washington ahead of the IMF annual meeting.
While not explicitly excluding the possibility that the country might default, he said any attempt at an “orderly” restructuring of its debt would present challenges in its own right. “Giving the impression that an orderly restructuring of Greek debt can be done in a neat and tidy way is somewhat illusory to my mind.”
Mr Geithner, who wants European leaders to expand the remit of the EFSF by giving it powers to leverage its assets, said the battle against the debt crisis was more important than the effort to boost growth in Europe. Although he was quietly rebuffed at a meeting of EU finance ministers a week ago, he expressed confidence that Europe would seize the initiative.
However, he forecast “years and years of difficult financial pressure on those governments that were just living way beyond their means”.
