Friday 20 October 2017

Debt and equity markets tank on Greek default fear

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Donal O'Donovan

Donal O'Donovan

DEBT and equity markets continued their downward streak yesterday on fears yet again that Greece is close to a national default.

Shares in the three biggest French banks -- Societe Generale, Credit Agricole and BNP Paribas -- each slumped more than 10pc.

All three are now at risk of imminent ratings downgrades because of their exposure to Greek debt, as well as the danger of losses if Greek does default.

French banks have the biggest exposure to Greece because they hold a mix of Greek government bonds and loans to Greek companies and individuals suffered the biggest falls. German banks are the biggest holders of Greek government bonds.

It meant the bank sector was worst hit yesterday, but the extent of the sell-off saw shares drop across countries and sectors. The anti-European trading bias saw the euro fall to a 10-year low against the Japanese yen and a seven-month low against the dollar.

The latest speculation of a Greek default comes after weekend reports that Germany's finance ministry has begun considering plans for Greece to leave the euro -- that would be sure to trigger a national bankruptcy.

Germany's planners may simply be assessing the potential impact of a Greek exit, rather than planning to push Greece out of the euro, but investors are in no mood to take chances with cash.

A Greek government proposal to raise €2bn annually from property taxes did nothing to restore confidence in the country.

However, already dire sentiment was exacerbated by a nuclear accident in France and a stark warning from Citigroup that countries, including Ireland, faced more ratings downgrades.

The pan-European FTSE Eurofirst 300 index of top shares fell 2.7pc overall, and at one stage dropped to the lowest level since July 2009.

On Wall Street, the Dow Jones industrial average fell 1.05pc, with energy and materials as well as banks hit.

In a research note circulated last night Citi's analysts said that Italy, Spain, Greece, Portugal and Cyprus could be downgraded within months and Italy, Spain, Portugal and Ireland and possibly Belgium faced further downgrades over the next two to three years.

Ratings

"We do not expect any ratings upgrades among advanced economies, either over the next few months or the next two to three years," the Citi analysts said.

In London Suki Mann, a strategist at Societe Generale, warned that cutting Greece loose to default would not end the debt crisis.

"The contagion impact of a default will be severe, because next in the firing line will be Italy, Spain and it will take in the whole of the European banking sector too," the strategist at Societe Generale SA wrote in a note.

"This trio are already under intense pressure, but it will get much worse."

The euro yesterday fell as low as $1.34949, the lowest since February, but recovered in late trade after the French financial regulator said his country's banks could cope with the Greek crisis.

The brutal trading, however, spread from equities to the debt market during the day, with the cost of insuring Greek bonds unsurprisingly hitting a record. The cost of insuring against a default by Ireland, Italy, Spain and Portugal all surged. (Additional reporting Reuters and Bloomberg)

Irish Independent

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