Global markets plunge as eurozone crisis deepens

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Global markets plunge as eurozone crisis deepens
By Nick Beams
21 May 2010

Global markets yesterday plunged for the third day in a row as concerns grow
that the eurozone crisis is threatening the stability of the entire
international financial system.

A day of sell-offs, starting in Asia, concluded with Wall Street’s Dow Jones
index falling 376 points, a drop of 3.6 percent, amid expectations that the
plunge will continue when markets open today. The cumulative three-day fall on
Wall Street is 825 points.

The market is approaching levels reached during the so-called “flash crash” of
May 6, when it plunged by 1,000 points in less than 20 minutes. That plunge was
initially put down to a “fat finger” error—incorrect data being typed into a
computer trade—but an investigation by the Securities and Exchange Commission
has found no evidence of such an event.

According to one financial trader cited by Reuters: “The primary mover [in the
Wall Street fall] is coming from Europe. There are still fears of a debt crisis
over there and the fact that it could spread to the banking system.”

Federal Reserve governor Dan Tarullo told the US Congress that as a result of
the eurozone crisis US banks could “pull back on their lending, as they did
during the severe financial market dysfunction that followed the bankruptcy of
Lehman Brothers”. He noted that 10 large US banks have $60 billion in exposure
to European countries, an amount equal to 9 percent of their tier one capital, a
key measure of their financial strength.

With the temporary boost to the markets provided by the European Union’s €750
billion ($US1 trillion) rescue package having completely dissipated, Tarullo
said investors were “aware that this package cannot ultimately relieve the need
for real, and likely painful, fiscal reforms in the euro area”.

There are fears that the demands of the German government of Chancellor Angela
Merkel to impose severe penalties on eurozone members that do not maintain tight
fiscal constraints could deepen the already significant divisions in the
monetary union.

Those divisions became apparent in the behind-the-scenes wrangling that preceded
the announcement of the EU rescue package on May 10 and came into public view
with Germany’s unilateral decision this week to ban “naked short selling”—the
practice in which banks and hedge funds sell bonds they either do not own or
have not borrowed, hoping to create a fall in the market from which they can
then profit by buying the bonds they previously sold.

Defending the move in an interview with the Financial Times, German finance
minister Wolfgang Schäuble said that while debt had to be brought under control,
there also had to be tougher regulation of financial markets. “I’m convinced the
markets are really out of control. That is why we need effective regulation, in
the sense of creating a properly functioning market mechanism,” he said.

Later, when asked about the opposition in financial markets to the move,
Schäuble told reporters: “If you want to drain a swamp, you don’t ask the frogs
for an objective assessment of the situation.”

These measures, which in themselves will do little or nothing because they can
be easily circumvented, have only increased market turbulence because they have
also underscored the divisions among the European powers.

One British official was reported to have described the ban as “crackers”.
Earlier, French finance minister Christine Lagarde said the move was “debatable,
because there was no prior discussion”. She insisted that the euro was not in
danger despite Merkel’s warnings that the euro remained under threat and the
bailout package could only bring a temporary respite.

Merkel’s comments on the dangers to the euro brought a bitter response from
other European leaders. Luxembourg prime minister Jean-Claude Juncker, who
chairs meetings of the eurozone finance ministers, said: “In my opinion, certain
people would do better to think before they speak … sometimes they would do
better to keep their mouths shut.” He later insisted his comments were not
directed at Merkel.

Yves Leterme, the Belgian prime minister, was more direct: “We finalised an
agreement to defend the euro. We cannot, like Madame Merkel, call into question
its feasibility.”

Besides its impact on the US, the euro crisis is stoking fears in China and the
rest of Asia of a significant economic downturn. Qi Zhongyi, the director of the
information department of the China chamber of commerce for the import and
export of machinery and electronic products, told the Financial Times that many
Chinese companies had suffered “huge losses” because of the 14.5 percent decline
of the euro against the renminbi so far this year. He said while a full
investigation had not been carried out, the losses were not confined to
machinery and electronics exports.

The EU is China’s biggest export market, accounting for 19.7 percent, or $236
billion of its exports last year. The sharp decline of the euro completely
disrupts the US plan to try to secure a revaluation of the Chinese currency to
improve its own trade position.

There are also fears that by cutting growth, the European crisis will severely
affect the profits of resource companies selling to China. Tom Albanese, the
chief executive of the mining giant Rio Tinto, has said he fears a rerun of the
crisis of 2008 when the seizing up of credit markets had a major impact on
Chinese growth in the fourth quarter.

These concerns are reflected in the “sell Australia” wave that has ripped
through financial markets, leading to a plunge in the Australian dollar. The
Australian currency has fallen to US82.5 cents, compared with US90 cents last
week and US93 cents at the end of last month. Because its fortunes are so
closely tied to the Chinese economy and its demand for industrial raw materials,
the Australian dollar is often considered a bellwether for risk. Its precipitous
decline in the past 10 days is a sure sign that global financial and economic
risks are rapidly rising.

http://wsws.org/articles/2010/may2010/shar-m21.shtml

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