The spike in fear roiling Australian shares has spread through Asian bourses, as investors grapple with the fear that Italy will be plunged into a debt crisis that would be felt throughout the banking world.
The plunges that have sent the S&P/ASX 200 nearly 2 per cent lower today have also triggered a 1.3 per cent fall on Japans Nikkei 225, which is trading down 132.4 points to 9937, while Hong Kongs Hang Seng Index is down 2 per cent, or 444 points, to 21,903.
“Things in Europe just seem to be going from bad to worse; you get the feeling that authorities are merely trying to plug the holes in a sinking ship,” said IG Markets strategist Ben Potter. “At the end of the day, theyre just delaying the inevitable.
“Until hard decisions are made and a long-term solution is found, these concerns are going to continue to derail global confidence, potentially for years to come.”
“Now that Italy is the talking point, the whole situation has taken a nasty turn in terms of contagion, said Mr Potter. Whereas there wasnt much US exposure to Greek debt, Italy is a completely different kettle of fish. The US exposure to Italy would be enormous compared to Greece, meaning this weighs on US banks as well.”
Investors are worried that default by Italy could make institutional banks around the world afraid to lend to each other – in effect locking up global credit markets.
A sudden shortage of credit could squeeze Australian banks, which rely on global wholesale funds for borrowing.
A shortage of funds for local banks could push home prices lower, as neither banks nor borrowers would have enough access to the generous funding that helped drive home prices higher in recent years.
Platypus Asset Management Portfolio Manager Simon Bonouvrie said memories of a second leg to the global financial crisis have sent markets tumbling.
The ultimate fear is a replay of the global financial crisis, he said. I dont think it will get to that stage.
Its almost like the markets are bullying the central bank over in Europe to fix a problem, he said.
Another analyst was more pessimistic about the fate of Europes shared currency, based on recent events overseas.
Hong Kong-based James Barnes of GaveKal Dragonomics compared the fate of the euro zone to the former Soviet Union.
“The coming three months are thus likely to be very important to the euros survival,” he said. Simply put, the market is increasingly indicating that it is losing patience with policymakers attempts at fudging answers.
[However] Europes policymakers may have little choice but to fudge because the solutions to the euro dilemma are no more feasible than the solutions to fix the Soviet Union in 1990; when technocrats have built a system that cannot work, we perhaps should not be surprised when it implodes.
Westpac senior currency strategist Sean Callow said that in the event of a full blown credit crisis, many types of investments would be hit.
Interbank lending is certainly front and centre when credit dries up, with reverberations to every asset market, he said. Flight to safety means demand for (US) Treasuries and selling of just about everything else – equities, commodities, real estate.
Businesses would find it much harder to borrow, with implications for jobs, he said.
Furthermore, the Australian dollar would likely fall in value.
Similar Posts:
- Housing stress test spooks market
- Fifth pillar bid is ‘a joke’
- Sarkozy, Merkel agree to stop sniping on ECB crisis
- Wall St gains on Europe, Accenture rises late
- Euro dips, stocks edge up in nervous trade
