Global markets plummet as uncertainty grips investors

THE EUROPEAN Central Bank’s efforts to stem the euro zone debt crisis eased the pressure on Italy and Spain but failed to reassure investors as global stock markets plummeted again, writing $2.5 trillion (€1.75 trillion) off the value of global stocks yesterday.

A sell-off of banking stocks led US markets downwards, resulting in the Standard Poor’s 500 Index worst day since December 2008, with every stock in the benchmark index ending in negative territory.Bank of America closed down 20 per cent, while Citigroup fell 16 per cent.

The cost of borrowing by Italy and Spain fell the most since the euro was introduced in 1999 as the ECB bought their debt to stop the crisis spreading to the euro zone’s third- and fourth-largest members.

The Frankfurt-based bank also bought Irish and Portuguese debt, pushing the notional cost of Irish Government 10-year loans below 10 per cent for the first time since last April.

Italian and Spanish debt costs on 10-year money fell towards 5 per cent, away from the crucial 7 per cent mark regarded as the tipping point for the bailouts of Greece, Ireland and Portugal.

The fallout from the withdrawal of the top AAA credit rating from the United States pushed world stocks to their lowest level in almost a year. Investors moved money to safer havens such as gold and Swiss francs.

The sell-off of shares has wiped $3.4 trillion off the value of world stock markets since July 29th, the equivalent of the gross domestic output of Germany. Oil prices fell to their lowest level in more than eight months, gold prices hit a record high, and the euro fell to a record low against the Swiss franc.

The Iseq index of Irish shares fell 4.4 per cent, while European shares closed down 4 per cent, hitting a two-year low, despite early gains from the ECB’s bond-buying.

Minister for Finance Michael Noonan said the ECB’s intervention seemed to have worked as Italian and Spanish borrowing costs had fallen to “well out of the bailout territory”. He pointed to market reports of the ECB buying about €2 billion in bonds, saying it was “a hopeful sign” that “a very small intervention” could lead to “such a major shift down in bond prices”. Mr Noonan told RTÉ Radio that Ireland could be “dragged back into difficulties by external forces” but that the crisis could lead to opportunities. “If a further round of talks about Europe and the advancement of fiscal policy in Europe occurs in the early autumn, we have a number of policy items to table there.”

Mr Noonan said it was not yet clear if he would seek savings of greater than €3.6 billion in the next budget.

Stocks declined after Standard and Poor’s followed its downgrade of the US last Friday by cutting the ratings of state-backed Fannie Mae, Freddie Mac and other lenders with a “direct reliance on the US government”.

President Barack Obama blamed the downgrade on Washington political gridlock and said he would offer recommendations on how to reduce federal deficits. “No matter what some ratings agency will say, we will always have a triple-A rating,” he said.

ECB president Jean-Claude Trichet defended the decision to buy the bonds of Italy, the world’s third largest issuer of debt, and Spain and deviate from its rules. “Our decisions in the euro zone did not have the intended effect,” he said in an interview.

Director at Dublin-based bond market specialist Glas Securities Michael Cummins said that in the absence of a long-term solution, buying Italian and Spanish bonds was “merely a Band-Aid solution”.