BRITAIN’S leading shares erased much of last week’s gain after concern Greece will baulk at the austerity cuts needed to secure fresh bailout cash, and instead nosedive into a disorderly default, prompted a flight from risk.
Banks were among the worst-hit sectors yesterday as international lenders ratcheted up the pressure on Athens, saying it must cut the size of the public sector and increase tax collection to avert a near-term default.
“It’s certainly been a tough start to the new trading week with markets selling off hard across the board, amidst these resurgent fears that the Greek default could now be imminent,” said Ben Critchley, sales trader at IG Index.
“The three big sectors – banks, energy and miners – have collectively taken almost 70 points off the FTSE 100, underlining just how tragic a Greek default will be to the global economy as a whole.”
A conference call between Greece, the European Union and the International Monetary Fund at 4pm yesterday was to be followed by a meeting of the Greek cabinet to discuss the cuts.
Even should a default be avoided in October, however, credit markets are pricing in a 90 per cent chance of an eventual Greek default, while a recent poll of economists put the likelihood at 65 per cent.
“In one form or another there is a high probability of a Greek default, but the question then is how will it be structured? What would be the consequence for the Eurozone and what burden does it mean for the other countries?” said Alexei Jourovski, head of equities at Swiss asset manager Unigestion, which manages $12.4bn in assets.
Adding to the bearish sentiment was yet more evidence over the weekend of the political discord surrounding the crisis, after Germany’s ruling coalition lost another regional election and a meeting of Eurozone finance ministers brought no fresh policy developments and evidence of disagreement with the United States.
The market jitters weighed on banks with Barclays, among the most exposed to the periphery states, down 6.5 per cent. Lloyds Banking Group fell sharply, down 6.7 per cent, as the surprise resignation of its finance director also weighed.
Shared risk in the event of a Greek default and little opportunity to diversify within the sector, even for UK banks, which are outside the euro zone, meant Jourovski was cautious on equities generally and “sharply underweight” banks.
“A Greek default would likely mean a CDS credit event which would normally trigger some form of settlement. The consequences of this are not clear and while the UK banks are less exposed directly, there could be large collateral damage.”
The FTSE 100 index closed down two per cent, or 108.85 points, at 5,259.56. It is down 2.5 per cent so far in September and 10.9 per cent year-to-date.
Commodity issues vied with banks on the blue-chip loserboard, after concerns about the debt crisis and weakening growth across the developed world prompted hefty falls for industrial metals such as copper, down nearly four per cent.
As a result, base metals-focused miners including Antofagasta, Kazakhmys and Xstrata – whose metals are used heavily in construction and industry – all fell between 6.8 per cent and 8.2 per cent by the close of trading.