Markets hit 15-month lows on Monday, the first day of trading in the fourth quarter of 2011, on fears that a near-inevitable Greek default may come sooner than investors expected - and before the European Union can complete its crisis response mechanisms.
In a meeting last night, European finance ministers decided to delay an €8 billion tranche of aid to Greece until November, raising concerns that the country may go bankrupt.
A planned meeting to discuss the decision on 13 October has also been cancelled. Greek officials had previously warned that they would run out of money some time in mid-October, and would be unable to pay workers’ salaries. The “Troika” - the European Union, International Monetary Fund (IMF) and European Central Bank (ECB) - which arranged the country’s first bailout in 2009, is also rumoured to be reassessing the terms of its second, €109 billion, bailout, which was agreed in July and was set to come into place next year.
Greece announced on Monday that it had missed its deficit reduction targets for October.
Rupert Watson, head of asset allocation at Skandia Investment Group, said that the fall was principally a reflection of weakening sentiment, rather than of any actual weakening in the fundamentals.
“Economic data, for what it’s worth, was actually better than expected. The ISM was stronger than expected, the construction was stronger than expected, and then late in the day we got the vehicle sales which were also stronger than expected,” he said. “In terms of the European side, there was nothing out of any real significance, but I think the reason why the market fell was that confidence ebbed further.
“Really, I think the problem for the whole world economy, and the eurozone in particular, is one of confidence,” Watson said.
Markets dipped further on Tuesday, with banks leading the slide downwards. The MSCI World equity index slumped to its lowest level since July 2010 as investors dumped stocks.
The greatest fear in markets is that the banks’ losses from a sovereign default will leave them unable to lend to businesses and individuals, causing credit to dry up, just as it did following the collapse of Lehman Brothers in 2008. Without money flowing around the system, the eurozone, and other developed countries, could slide back into recession.
Of particular concern on Monday was the Franco-Belgian banking group Dexia, whose exposure to debt in the eurozone’s peripheral members saw analysts question its solvency. This, Watson said, raised concerns that the debt crisis was showing symptoms in the core of the single currency area.
“That’s as core as core can be. When a French or Belgian bank starts running into trouble, then all the fears from Lehmans come back to haunt the markets,” Watson said, adding that such signs may indicate that the crisis is moving towards an endgame, with core countries, particularly Germany, likely to be spurred into more drastic action to end the crisis.
Measures to allow the eurozone’s bailout fund, the European Financial Stability Facility (EFSF), to inject capital into banks are currently going through the scrutiny of individual parliaments within the single currency area. However, the fund’s size - €440 billion - is now considered too small to both recapitalise the banks and prop up the Italian and Spanish debt markets.