Greek debt contagion fears stalk world markets as euro slides to one-year dollar low

Greek debt contagion fears stalk world markets

LONDON — World markets tumbled Tuesday as investors worried that Europe’s debt crisis would spread despite the weekend’s €110 billion ($143 billion) bailout package for Greece. The euro took another hammering, dropping to a one-year low against the dollar.

In Europe, the FTSE 100 index of leading British shares closed a hefty 142.18 points, or 2.6 percent, at 5,411.11 on the first day of trading following the May Day public holiday. Germany’s DAX dropped 160.06 points, or 2.6 percent, to 6,006.86 while France’s CAC-40 slid 128.78 points, or 3.2 percent, to 3,705.68.

And on Wall Street, the Dow Jones industrial average plunged 225.82 points, or 2 percent, at 10,926.01 while the broader Standard & Poor’s 500 index fell 27.32 points, or 2.3 percent, to 1,174.94.

The selling was broad-based across sectors, though mining companies faced massive pressure after Australia’s government announced a super tax on profits. London has a raft of listed mining companies and they all occupied the top positions on the list FTSE 100 fallers — Eurasian Natural was the biggest casualty, falling around 12 percent.

However, the main reason behind the selling pressure was the Greek debt crisis — the bailout package has done little to assuage market fears that the crisis will spread to other countries like Portugal and Spain.

The euro was a major casualty of this fear of contagion — by late-afternoon London time, the single European currency was trading another 1.2 percent lower at $1.3022, its lowest level for a year. That means that the euro has dropped around two cents since Sunday’s bailout agreement for Greece.

“The nagging problems surrounding Europe are still yet another concern for investors with clear concern that the debt problems must surely raise their heads in Spain and Portugal,” said Tim Hughes, head of sales trading at IG Index.

“This worry does not look like it is going away anytime soon so, after recent weeks of fairly calm and steady progress for stock markets, the current dose of volatility may well be the order of the day for the short-term at least,” he added.

It’s certainly been volatile — on Monday, U.S. stocks enjoyed their biggest advance in nearly three months following a raft of positive economic data and relief that a bailout package for Greece had finally been agreed after months of procrastination.

Though nothing emerged Tuesday to diminish hopes for the U.S. economic recovery, investors are taking a cold, hard look at the Greek bailout — as well as doubts about the Greek government’s ability to push through massive austerity measures in return for the cash. The bailout has done nothing so far to alter the fact that other countries in the eurozone face budgetary difficulties.

One bailout maybe acceptable to the powers that be, but two could be stretching it and that’s clearly evident in the performance of the main markets in Athens, Lisbon and Madrid — down 7 percent, 4.7 percent, 2.2 percent respectively.

Though Portugal has been planning to issue bonds during the second quarter, Jane Foley, research director at Forex.com warned that the country may not be able to tap the markets for cash if its borrowing costs continue to spike, raising the nightmare scenario that a second eurozone country would need to be bailed out.

“This would force eurozone officials to address the question as to how far they are willing to bend their own rules to maintain the semblance of coherence within the eurozone,” said Foley.

As a result, a number of analysts are beginning to think that the European Central Bank will have to get more involved in the crisis to keep Spain and Portugal from being dragged into a debt crisis quagmire like Greece, where market fears led to interest demands so high Athens couldn’t borrow any more.

The idea being openly discussed is that the ECB may support bond prices — and the balance sheets of banks holding them — by buying government bonds even though the bank’s constitution says it can’t directly bail out profligate governments.

“Ultimately, the ECB may have to rewrite the rules,” said Neil Mackinnon, global macro strategist at VTB Capital.

Elsewhere, BP PLC, Europe’s biggest oil company, remained under pressure as investors worried about its exposure to the disastrous oil spill in the Gulf of Mexico — there are estimates that BP’s cost for the cleanup could total as much as $16 billion.

There are also fears that BP’s brand name has been damaged by the spill even though BP’s Chief Executive Tony Hayward insisted the company will meet all “legitimate” claims related to the environmental disaster.

BP, which has a big impact on the overall level of the FTSE because of its position as one of the index’s biggest companies by market value, was down 3 percent.

Earlier in Asia, stocks were dragged down on concerns that Chinese moves to slow a soaring property market will undermine economic growth while Thai stocks vaulted on hopes of a resolution to the country’s political crisis.

China’s benchmark index in Shanghai fell 35.33 points, or 1.2 percent, to 2,835.28. This was Shanghai’s first opportunity to respond to Monday’s move by the People’s Bank of China to raise the deposit reserve requirement ratio for most banks for the third time this year, the latest in a series of measures aimed at cooling the country’s skyrocketing property prices.

Elsewhere, Hong Kong’s Hang Seng fell 0.2 percent to 20,763.05 while Indonesia gained 0.2 percent. South Korea’s Kospi slipped 0.1 percent to 1,718.75. Singapore dropped 1 percent.

Big gains were posted in Thailand, where the benchmark stock index surged 4.1 percent after Prime Minister Abhisit Vejjajiva proposed a Nov. 14 date for fresh polls if anti-government protesters occupying central Bangkok accept his reconciliation plan and peace and stability is restored.

Benchmark crude for June delivery was down $3.09 to $83.10 a barrel in electronic trading on the New York Mercantile Exchange as the dollar strengthened.

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Associated Press Writer Alex Kennedy in Singapore contributed to this report.