FINANCIAL stocks led Britain’s FTSE 100 sharply lower yesterday, after the Greek Prime Minister’s call for a referendum on the bailout package agreed last week sent shockwaves through markets and heightened tensions over debt contagion.
London’s blue chips fell 122.65 points or 2.2 per cent to 5,421.57, echoing similar falls across the globe as investors deserted riskier assets on concerns a Greek ‘no’ vote could be catastrophic for the euro and the banking system.
“By calling a referendum, Papandreou has given 12m Greeks a decision that has massive and potentially devastating ramifications for the 500m inhabitants of the European Union,” Louise Cooper, markets analyst at BGC Partners, said.
The Greek government faced possible collapse after Prime Minister George Papandreou shocked investors and angered fellow EU leaders by letting Greeks vote on the €130bn ($178bn) bailout package, with many voters already deeply disenchanted with austerity measures.
Expressing concern at Papandreou’s snap decision to call a referendum, Jean-Claude Juncker, the chairman of the Eurogroup countries said Greece could face bankruptcy if the population ends up voting against the bailout.
German and French leaders are due to meet their Greek counterparts ahead of the G20 summit tomorrow.
Having gained just over eight per cent in October, the UK’s benchmark has fallen 5.1 per cent in three trading days and back into the range -- 5,000 to 5,450 -- that it had previously struggled to breakout of between August and October, when investors were baying for politicians to bring an end to the Eurozone debt crisis.
With gains having been capped at the 200-day moving average of around 5,710 on Thursday, the FTSE is now attacking the 50-day moving average support level of around 5,310.
Investors responded to the uncertainty brought on by Greece by ditching risky equities and piling their cash into safer assets such as German and UK government bonds.
Yields, however, in 10-year Greek and deeply indebted Italy and Spain government bonds rose as the risk that the countries would be unable to repay their debts grew.
The FTSE volatility index, a gauge of investor fear, which had stabilised after the announcement of the EU rescue plan last week, shot up 25 per cent.
Those with the most to lose should EU countries begin defaulting fell furthest. Banks fell 3.5 per cent and insurers shed 7.2 per cent.
Hedge fund firm Man Group, which has been struggling to retain client money amid relentless volatility, fell 9.3 per cent.
Sentiment among financials was further dented as investors fretted over potential exposure to MF Global, which filed for bankruptcy protection on Monday.
And the mood further darkened as Credit Suisse said it was cutting a further 1,500 jobs and scaling back its capital-guzzling investment banking business, as it dealt with tougher banking regulations and the impact from the Eurozone’s problems.
Europes debt woes weighed too on global factory activity, which slowed down in October on weak demand for exports, raising the risk that the debt crisis could drag the global economy into recession.