Stocks slumped globally yesterday and the euro dropped to a four-year low point, hit by sudden German trading controls, as German Chancellor Angela Merkel issued a dire warning about the eurozone crisis.
In late morning deals, London sank 2.30 percent, Frankfurt shed 2.59 percent and Paris lost 2.84 percent. Stock prices in Athens fell 2.25 percent, Madrid dropped 3.13 percent and Milan fell 3.69 percent.
The euro nose-dived to US$1.2144 in earlier Asian deals, hitting the lowest point since April 17, 2006. The currency later pulled back to US$1.2181.
“Angela Merkel’s knee-jerk reaction to ban speculators from short-selling debt has sent the markets into a tailspin,” ETX Capital senior trader Manoj Ladwa said in London.
“The reverberation of her decision is likely to have a serious negative impact on not only the euro, but also other European countries that may impose a similar restriction,” he said.
Merkel yesterday called for a radical overhaul of Europe’s fiscal rules along German lines, warning of “incalculable consequences” for the EU if the euro were to fail.
“The current crisis facing the euro is the biggest test Europe has faced in decades, even since the Treaty of Rome was signed in 1957,” she said in a speech in parliament, referring to the treaty that created the EU.
“This test is existential and it must be overcome ... if the euro fails, then Europe fails,” Merkel added, defending Germany’s slice of a near trillion-dollar package to prevent Greek debt woes spreading across Europe.
“The euro is in danger. If we do not avert this danger, then the consequences are incalculable and the consequences for the whole of Europe are also incalculable,” she said.
In a unilateral move, Germany’s securities market regulator Bafin on Tuesday slapped a ban on so-called “naked” short-selling in shares of 10 financial institutions and eurozone government bonds, in a bid to end markets volatility.
“The extraordinary volatility of the bonds of eurozone states” justified the short selling ban, Bafin said a statement.
The EU reacted by calling for coordination against speculative trading, while French Finance Minister Christine Lagarde voiced reservations and said other states should have been consulted first.
Naked short-selling occurs when investors sell securities they do not own and have not even borrowed, hoping to be able to buy them back later at a lower price, thereby earning a profit. In regular short-selling the trader borrows the security before selling it.
Shares across Asia were also lower as the euro’s woes weighed on exporters and worries about eurozone debt persisted, with Hong Kong slumping 1.08 percent and Tokyo shedding 0.54 percent.
“The German decision to ban short-selling suggested policymakers were deeply worried about threats to their banks from their lending to Greece,” said John Kyriakopoulos of National Australia Bank in Sydney.
Sydney fell to its lowest level in nine months, giving up 1.87 percent, or 83.6 points, to close at 4,387.1, weighed by the debt fears as well as a proposed 40 percent tax on mining profits. Shanghai gave up 0.27 percent, or 6.98 points, to end at 2,587.81.
Elsewhere, Singapore fell 2.45 percent, or 69.81 points, to 2,774.54, while Seoul closed 0.80 percent, or 13.16 points, lower at 1,630.08. Manila fell 1.31 percent, or 42.88 points, to end at 3,222.19.
Meanwhile, there was little comfort from top economist Nouriel Roubini, who was one of the few experts to forecast the financial crisis.
“What’s happening in Greece is just the tip of an iceberg of a broader range of sovereign debt issues, of deficit, in many advanced economies,” he warned late on Tuesday.
The new crisis could occur “not just in the eurozone but UK, US, or Japan,” he said in a speech at the London School of Economics. “The next stage of the crisis could be a sovereign debt crisis that could lead to a double-dip recession.”
He reiterated his view that “there is a possibility of a breakup of the monetary union.”
“One or more countries of the eurozone could default,” he said.
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