Markets slide further on euro woe

5 September 2011 Last updated at 10:38 ET

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Stock markets have continued the slide they began late last week as fears over Italian and Spanish debts have reasserted themselves.

European markets dropped 5% in Monday trading, led by more big falls in bank shares.

Market borrowing costs for Italy and Spain have begun to creep up again, despite the European Central Bank’s decision to buy up their debts.

It also emerged that European banks may have been shifting cash to the US.

Slowdown

Frankfurt’s Dax index had fallen 5.8% by early afternoon trading, while the Paris Cac 40 was down 5.2% and the FTSE 100 a comparatively modest 3.6%.

The German and French markets are close to the lows seen during the sharp sell-off in early August.

Asian markets also fell, with the Nikkei in Tokyo ending the day 1.9% down, and Hong Kong’s Hang Seng 3% lower. US markets remain closed on Monday for Labor Day.

The current slide in markets, which began in late Thursday trading in New York, has been triggered by mounting evidence of a slowdown in the global economy and fears over the impact of US and European government austerity.

In the latest such indication, on Monday data on the services sector from the research group Markit showed that activity in the UK almost stagnated and business confidence in the eurozone fell at its fastest rate in August since the 2008 collapse of Lehman Brothers.

The surveys confirmed a particularly sharp slowdown in activity at German service sector firms, while France seemingly bucked the trend.

Banks have been hit hard in the latest market sell-off

Slowdown fears have also begun to hit the oil market, with Brent crude briefly dropping 2% in volatile trading on Monday.

Cash transfers

Bank shares have taken the brunt of the latest stock market sell-off.

Royal Bank of Scotland fell 11.5% by mid-afternoon on Monday, Deutsche Bank was down 8.6% and Societe Generale 8.2%.

Most major banks in the US and Europe have lost about half of their value over the last six months.

Fears began to mount again that the eurozone may not be able to contain its debt crisis, and a government default could in turn lead to a European banking crisis.

Deutsche Bank’s outgoing chief executive, Josef Ackermann, said on Monday that some European banks would go bust if they were forced to recognise in their accounts the existing losses on government debts they own, based on current market prices for government bonds.

Banks also face the prospect of being sued by US government mortgage agencies for mis-selling home loans during the housing boom, while the Financial Times reported on Monday that Deutsche Bank headed a list of banks being investigated in the Serious Fraud Office for similar mis-selling in the UK.

Meanwhile, evidence emerged that some analysts suggest shows that European banks have been transferring large amounts of cash across the Atlantic in a bid to escape an emerging European banking crisis.

Data released by the US Federal Reserve on Friday indicated that unnamed foreign banks transferred cash into the country’s banking system over the summer, while separate data from the ECB that shows that European banks have been withdrawing their cash from the European banking system.

Italy v Germany

Talks between Greece and its rescue creditors – the European Union and International Monetary Fund – had to be suspended on Friday because of Athens’ failure to keep to its previously-agreed deficit cutting schedule.

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That triggered a further rise in borrowing costs for Spain and Italy – seen by markets as the next dominoes to fall.

On Monday, a spokesman insisted the Greek government would still implement its programme and expected the latest September tranche of rescue loans to be disbursed, but markets were unmoved by the statement.

Italy’s 10-year borrowing cost reached 5.56%, up from 5.25% on Friday and 4.9% in mid-August.

The level is still well below the high of 6.2%, seen at the beginning of August, that prompted the ECB to start buying up Italian and Spanish debts.

But despite the central bank’s efforts, investors have begun to desert Spanish and Italian debts once more, in favour of German government bonds.

With German debt continuing to rally, Berlin’s 10-year cost of borrowing tumbled to just 1.88% on Monday.

The rally in German debt reflects not only the country’s role as a haven in the eurozone, but also expectations that the ECB will have to keep rates low for much longer in response to the apparent economic slowdown.

Borrowing costs for the US and UK governments – which similarly face prolonged low interest rates amid the slowdown – have also fallen sharply back towards post-war lows they set last month.

The euro fell a further 0.9% against the dollar to $1.4074 – bringing its cumulative fall over the past week to 3.3% – and also fell 1.4% against the Swiss franc, towards the 1.10 franc level.

Meanwhile, gold – the most popular safe investment – also rallied, breaking above $1,900 per troy ounce again. It hit a record high of $1,913.50 last month.

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