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Wednesday, May 9, 2012

More than £25bn wiped off UK's biggest companies as Greece and France spook investors




The FTSE 100 slid 1.8pc to close at its lowest level this year, falling 100 points to 5,554, following the Greek electorate's rejection of the austerity measures that are a condition of its two bail-outs, worth a combined €219bn. European markets followed suit, with Germany's Dax dropping almost 2pc and France's CAC sliding nearly 3pc.

The US Dow Jones Industrial Average dipped 1.3pc in early trading after digesting the weekend's tumultuous developments for a second day.

The eurozone's relative stability since the turn of the year was brought to a shuddering halt over the weekend by Francois Hollande's victory in the French presidential election on an anti-austerity ticket, and Greece's hung parliament. On Tuesday, Herman Van Rompuy, president of the European Union, summoned leaders for crisis talks on May 23 to discuss efforts to foster growth in the wake of the popular uprising against cuts.

Amid the mounting panic, investors piled into safe havens. UK 10-year gilt yields closed at their lowest level since records began in 1703, at 1.93pc – although just above January's intra-day low of 1.92, while German bunds and US Treasuries also edged lower. Buoyed by investor interest, the pound surged to a near-four year high against the euro, rising 0.97 cents to €1.2419.

"Markets are now all about safe havens," Stephen Lewis, economist at Monument Securities, said. "Traders are worried about some new political crisis blowing up in the eurozone. Greece has made it inevitable that there will be some challenge to the eurozone authorities before the end of June."

The decision by two-thirds of the Greek electorate to vote for anti-austerity parties shocked markets and moved the country closer to the eurozone exit. Alexis Tsipras, leader of the radical leftist Syriza party that came second, said: "The popular verdict clearly renders the bail-out deal invalid."

Mr Tsipras has refused to go into coalition with his larger rival, New Democracy, and demanded it revoke austerity measures tied to the bail-out. Greece is now expected to go back to the ballot box next month to try to secure a mandate for a new government. However, the country is running out of time as it needs to agree another £11bn of savings to qualify for future bail-out instalments. The latest €5.2bn tranche is likely to be approved on Thursday, though.

Anticipating the worst, Mr Lewis said he hoped the eurozone authorities have begun working on a "smooth" exit plan for Greece. Similarly, Paul Taylor, chief executive of Fitch ratings agency, claimed a Greek exit would be manageable, and not mark the end of the single currency.

With voters rejecting austerity, sentiment in the markets as well as political corridors appeared to shift on Tuesday. Charles Dallara, head of the Institute of International Finance who negotiated the private sector writedown in the second Greek bailout, said leaders could slow the pace of cuts.

Germany, though, maintained its hard-line stance, with Foreign Minister Guido Westerwell saying: "The end of the debt policy has been agreed in Europe. It has to stay that way."

His comments came as German industrial production pointed to a rebound from the contraction of the last quarter of 2011, and the International Monetary Fund said conditions were in place for "a domestic demand-led recovery" this year.

However, the IMF added that the euro powerhouse could do more to help to end the continent's debt crisis. "[The] reduction of imbalances in the euro area would be helped by the natural rebalancing of Germany's economy," it said.

Meanwhile, Reuters reported on Tuesday night that Spain's government will demand its banks raise a further €35bn in provisions against sound loans in their property portfolios. Reuters claimed the move is set to be announced after a regular Friday cabinet meeting.

The Telegraph

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