Thursday

5th Aug 2021

World markets plunge amid worsening euro-crisis

  • Markets are not convinced Europe can cope with the debt crisis (Photo: Ahmad Nawawi)

Stock markets plunged on Thursday (4 August) to levels last seen in 2008 at the height of the financial crisis, amid worsening concerns about the US economy and Europe's capacity to overcome their debt problems.

Wall Street recorded its worst day since December 2008, with the Dow Jones index closing down by 4.3 percent. Markets in London, Frankfurt and Milan fell by 3 to 5 percent.

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The drops came after the European Central Bank started buying government bonds from Portugal and Ireland.

The move did little to allay fears that the debt crisis could engulf the core eurozone, however.

German chancellor Angela Merkel, French President Nicolas Sarkozy and Spanish Prime Minister Jose Luis Rodriguez Zapatero have also announced a snap teleconference on Friday.

Italy and Spain's bond yields passed the six-percent threshold this week, meaning that their debt is considered unsustainable in the long run. Madrid on Thursday decided to suspend a bond sale planned for 18 August, even though it claimed this has nothing to do with current market turbulence.

EU monetary affairs commissioner Olli Rehn is set to speak to journalists on Friday "on current developments in the eurozone." Both his superior, commission chief Jose Manuel Barroso, and the ECB have warned that governments and the European Parliament are moving too slow to stem the crisis after a deal struck in July allowing the eurozone's bailout fund (EFSF) to do more to pre-empt contagion.

In a letter sent to eurozone leaders, Barroso said the measures agreed on 21 July "are not having their intended effect on the markets" and urged a "rapid reassessment" of the EFSF.

Neither the German chancellor nor the Dutch finance minister thanked him for the letter, saying it is unnecessary to re-open the discussion on topping up the bailout fund.

The size of the mechanism - €440 billion - is deemed insufficient if it Italy or Spain need help.

The ECB's intervention on the bonds market on Thursday did not live up to market expectations because the purchase was limited to Portuguese and Irish bonds, not Italian or Spanish ones.

In a sign that concerns are not limited to the Mediterranean area, British regulators are now pushing UK banks to make public their exposure to troubled eurozone countries, including Belgium.

In addition, concerns are mounting in the US that Congress may after next year's elections begin to unpick the 11th hour debt ceiling deal struck last week.

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