World stocks plunge on Greek default

LONDON - World stocks plunged Tuesday after Greece announced a referendum on its latest bailout deal, agreed only last week, putting the hard won accord in jeopardy and Europe in uncharted waters.

Dealers said the announcement late Monday by Greek Prime Minister George Papandreou completely trumped any idea the Greek debt issue could be resolved gradually, so allowing the rest of the eurozone to put its house in order.

The news was even more troubling as it followed weak Asian manufacturing growth data, especially in China, the world's number two economy, which further clouded an already very uncertain outlook.

"The wheels look set to fall off the European bailout effort as the Greek prime minister's call for a referendum sent the market into a tail spin," said ETX Capital trader Manoj Ladwa in London.

The markets have tumbled as investors begin "to factor in an ever increasingly likelihood of a Greek default," Ladwa said.

In mid-afternoon trade, London's benchmark FTSE 100 index was down 2.50 percent, Frankfurt's DAX 30 dived 4.18 percent and in Paris the CAC 40 slumped 4.37 percent, with banks leading the losses.

Italian stocks were especially under pressure, losing more than 7.0 percent at one stage as investors looked to cash out at all costs amid increasing fears Rome will need outside help to get through its debt crisis.

The apparent impasse between Prime Minister Silvio Berlusconi and his coalition partner the Northern League makes the situation worse, forcing Italian borrowing costs back toward dangerously high levels Tuesday.

The yield on Italian 10-year bond to around 6.2 percent Ñ close to its record of 6.397 percent reached in August, reflected growing nerves over the outlook for Rome.

"We all known that when our borrowing rate is close to seven percent our debt risks becoming unsustainable. The situation is extraordinarily serious," Nicola Rossi, an opposition senator and economist, told news channel SkyTG24.

"The problem is that Italy is the weak link in the euro chain so we are under particular scrutiny," he said.

In Spain, where the Socialist government is widely expected to lose general elections later this month, stocks were down 4.25 percent and Athens was off nearly 7.0 percent.

Dealers said the markets had managed to come off their earlier lows to some extent but any bounce looked entirely technical and could not be trusted to last in the circumstances.

The euro fell sharply to $1.3677 from $1.3851 in New York late Monday.

In New York, the blue-chip Dow Jones Industrial Average, which lost more than two percent on Monday, tumbled another 1.71 percent and the tech-heavy Nasdaq Composite shed 2.02 percent.

Fred Dickson at DA Davidson & Co. said Papandreou's announcement threw global markets into turmoil, less than a week after the EU bailout and reform plan unveiled Thursday sparked a massive relief rally.

"It is unclear what happens if the Greek people vote down the reforms required for the current round of bailout funds from the International Monetary Fund and the European Central Bank," he said.

The latest twist in the debt crisis saga comes as leaders of the world's 20 biggest economies get ready for a summit in France on Thursday and Friday where they hope to pool efforts so as to keep the global economy on track.

After last week's eurozone debt deal, the mood turned much more positive but the Greek turnabout risks creating even more turmoil.

"Clearly, from the perspective of financial markets, the (referendum) news increases the risk of a disorderly Greek debt default as well as increasing the probability that France and Germany lose patience with Greece thus forcing a Greek exit from monetary union," said VTB Capital analyst Neil MacKinnon.

At traders IG Index in London, chief market strategist David Jones said the referendum decision "is a shock to investors who thought that we were finally nearing the end" of the region's debt crisis.

"It raises the prospect of the crisis dragging on further still, continuing the uncertainty for stock markets. Not surprisingly, some of the biggest casualties ... are the banks."

In Asian trade earlier Tuesday, Tokyo fell 1.70 percent, Hong Kong dropped 2.49 percent lower and Sydney lost 1.52 percent.

© Copyright (c) AFP, Photograph by: Angelos Tzortzinis/Bloomberg, xx

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