Greek PM Calls for Referendum on Latest Rescue Package, Hitting Banks Hard

November 1, 2011 - 7:25 AM
Japan World Markets Dollar

People are reflected on an electronic board of a securities firm, which shows the yen-dollar foreign exchange rate, a day after after the Bank of Japan weakened its currency to help Japanese exporters, in Tokyo, Japan, Tuesday, Nov. 1, 2011. On Monday, The Bank of Japan says it sold yen and bought dollars during Tokyo trading in order to pull the yen down from a post-World War II high against the dollar. (AP Photo/Koji Sasahara)

LONDON (AP) — Stocks slumped Tuesday on renewed concerns over Europe's debt crisis after the Greek prime minister unexpectedly called for a referendum on the country's latest rescue package — a vote that could decide whether Greece remains in the euro currency union.

European stocks and the euro were sharply lower, while Italian and Spanish bond yields ratcheted higher. All are signs that the euphoria with which markets greeted last Thursday's plan from the eurozone is being quickly reversed.

On Monday, sentiment was already turning sour after U.S. brokerage firm MF Global filed for bankruptcy amid reports that it had bought too much bad European debt and fears over the public finances of Italy, the eurozone's third-largest economy. Italy's debts dwarf the euro1 trillion ($1.4 trillion) that Europe's bailout fund will have at its disposal if last week's commitments are delivered.

"The 6-8 percent falls over two days have now effectively given back all the gains from the post Brussels meeting rally," said Louise Cooper, markets analyst at BGC Partners.

In Europe, the FTSE 100 index of leading British shares fell 3 percent to 5,380 while Germany's DAX slid 4.4 percent to 5,871. The CAC-40 in France was 4.3 percent lower at 3,105.

Unsurprisingly, Greek shares fared worse, with the main exhange in Athens down 6.3 percent.

The euro was 1.2 percent lower at $1.3690 and the yield on Italy's ten-year yield ratcheted up 0.20 of a percentage point to 6.19 percent.

Wall Street was poised for a second day of big falls — Dow futures were down 1.3 percent at 11,738 while the broader Standard & Poor's 500 futures fell 2 percent to 1,225.

The plan presented last week by the 17 leaders of the eurozone was intended to be Europe's comprehensive solution to a debt crisis that's already seen three countries, including Greece, bailed out.

The three-pronged strategy of boosting the bailout fund, getting private creditors to take a bigger hit on their Greek debt holdings and forcing the banks to raise more capital was largely viewed favorably by the markets, although details need to be ironed out.

The Greek referendum, which would be the country's first since 1974, is expected to be held early next year should the Socialist government survive a confidence vote later this week.

The renewed uncertainty it creates deflated any remnants of optimism over last week's grand European plan.

"The Greek government's decision to hold a referendum on the latest eurozone rescue package clearly increases the risks both of a bigger and disorderly default on Greek debt and, ultimately, of Greece leaving the euro," said Jonathan Loynes, chief European economist at Capital Economics.

The implications of a possible Greek exit and what it does to the future of the eurozone are likely to haunt markets all the way through to the referendum, should it take place.

As well as monitoring the turn of events in Europe, investors have a raft of economic news to digest this week, culminating in Friday's monthly jobs report.

The Federal Reserve and the European Central Bank also meet to decide on their monetary policies this week. The new ECB chief, Mario Draghi, will hold his first meeting and press conference Thursday. Investors will be looking for signs that the ECB is considering cutting interest rates and that it will continue its program of buying the bonds of troubled eurozone nations, especially Italy and Spain.

Earlier in Asia, stocks fell sharply.

Japan's Nikkei 225 index retreated 1.7 percent to close at 8,835.53. Hong Kong's Hang Seng lost 2.5 percent to 19,369.96 and Australia's S&P/ASX 200 shed 1.5 percent to 4,232.90. Benchmarks in Singapore, India, Indonesia and Thailand were also down.

South Korea's Kospi gained marginally to 1,909.63 and China's Shanghai Composite Index added 0.1 percent to 2,470.02.

Oil prices tracked equities sharply lower. Benchmark crude for December delivery was down $2.01 at $91.18 a barrel in electronic trading on the New York Mercantile Exchange.

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Pamela Sampson in Bangkok contributed to this report.