Global stock markets plunged yesterday 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,” Mr Ladwa said.
In London, the benchmark FTSE-100 index of top companies lost 2.21 per cent to 5,421.57 points – but even this sharp loss was better than most others.
In Paris, the CAC-40 slumped 5.38 per cent to 3,068.33 points and in Frankfurt, the DAX-30 was down 5.0 per cent to 5,834.51 points.
Milan tumbled 6.8 per cent and Madrid fell 4.19 per cent while Athens, the epicentre of the latest crisis, dropped 6.82 per cent.
Italy was especially under pressure as investors looked to cash out at all costs amid increasing fears Rome will need outside help to get through its debt crisis.
The impasse between Prime Minister Silvio Berlusconi and his coalition partner the Northern League makes the situation worse, forcing Italian borrowing costs toward dangerously high levels Tuesday.
The yield on Italian 10-year bonds rose to around 6.2 per cent – close to its record of 6.397 per cent reached in August, reflected growing nerves over the outlook for Rome.
“We all know that when our borrowing rate is close to seven per cent 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.
The euro fell sharply to $1.3706 from $1.3851 in New York late Monday but was off its lows.
In Asian trade earlier yesterday, Tokyo fell 1.70 per cent, Hong Kong dropped 2.49 per cent lower and Sydney lost 1.52 per cent.
In New York, the blue-chip Dow Jones Industrial Average, which fell more than two percent on Monday, tumbled 2.19 per cent and the tech-heavy Nasdaq Composite shed 2.62 percent, extending early losses.