EUROPE'S BANKS yesterday made a desperate appeal for the European Central Bank to buy the bonds of crisis-hit euro zone members, as a second day of turmoil in markets battered share prices around the globe.
Fears that a debt default by Greece could paralyse the world’s financial system – just as the collapse of Lehman Brothers did two years ago – sparked another wave of heavy selling in Asian, European and US stock markets.
Bank shares were the hardest hit, with those in Europe, seen as the most exposed should Greece fail to meet debt repayments, falling by up to 9 per cent. The FTSE Eurofirst 300 Index ended down 3.9 per cent at a six-month low, the FTSE 100 in London finished the week at a three-month low, while the Nikkei 225 Average plumbed a two-month low. Greek and Portuguese bonds also tumbled. In New York, US shares extended their losses in early trading, slipping 1 per cent.
Worried bankers from 47 European groups urged the ECB to become a “buyer of last resort” of euro zone government bonds to steady markets.
There was speculation that the central bank could be preparing a €600 billion ($762 billion) loan facility for one-year loans at 1 per cent to help more than 1,000 banks in their funding.
But as European leaders met in Brussels to give their formal approval to a three-year €110 billion rescue plan for Greece, there was no sign of imminent ECB action. French officials said it was imperative for Europe to act to stop the crisis escalating, but conceded there was no consensus on how to proceed.
Jean-Claude Trichet, the central bank’s president, said this week that its governing council had not discussed the purchase of government bonds at its meeting in Lisbon. But Mr Trichet added that it was willing to respond to unfolding events.
As markets tumbled in the wake of Wall Street’s plunge on Thursday, Olli Rehn, European Union monetary affairs commissioner, warned that the Greek crisis could bring the banking system to a standstill. “Little did authorities of the United States know in September 2008 what the bankruptcy of investment bank Lehman Brothers would lead to,” Mr Rehn said in a Finnish weekly magazine, Reuters reported.
“The consequence was that the world’s financial system was paralysed in a way that led to the biggest global recession since the 1930s.”
He added: “Consequences from Greece’s insolvency would be similar if not worse.”
Money market rates jumped and the cost for European banks to insure themselves against default rose to levels last seen after Lehman’s collapse.
In the past week, dealers said, banks on both sides of the Atlantic had found it more difficult to access the lending markets.
Alan Wilde, head of fixed income and currency at Baring Asset Management, called the mood “feverish”. He said: “A lot of markets are in danger of spinning out of control.”
The falls overshadowed positive US jobs data. The non-farm payroll report showed that 290,000 jobs were created in April, beating expectations of 190,000 jobs created. European investment-grade corporate credit default swaps hit their widest levels in over a year, and there was a rise in the premium that investors demand to buy peripheral euro government bonds rather than benchmark bunds.
“The panic trading that started today again is fading slightly but things remain quite vulnerable,” said Patrick Jacq, euro zone interest rate strategist at BNP Paribas. – Copyright The Financial Times Limited 2010
