Europe close: Stocks plummet on Greek woes, but euro recovers
European stocks tumbled on Monday, led lower by peripheral markets, while Greek bonds were battered as the debt saga in Athens took a turn for the worse, although the euro recovered from early losses against the US dollar.
Greek Prime Minister Alexis Tsipras has called for a referendum on 5 July so the nation can decide whether to accept the terms of the bailout being offered by international creditors.
Meanwhile, European finance leaders have refused to extend Greece’s bailout beyond Tuesday and the European Central Bank has frozen its emergency liquidity assistance to the debt-ridden country. As a result, the Greek government has imposed capital controls, closing the country’s banks for a week and imposing a cap of €60 a day on cash withdrawals.
The benchmark Stoxx Europe 600 index ended down 2.7%, while France’s CAC dropped 3.7% and Germany’s DAX finished 3.6% lower.
Bank shares in the region, particularly in the periphery, were pummeled, with Intesa San Paolo, UniCredit and Banco Santander also suffering heavy losses.
The Greek stock market was closed by government decree, but nearby Spain’s IBEX 35 plunged 4.5%, while Italy’s FTSE MIB ended down a whopping 5.2%,
With Greece hurtling towards default, investors sought the safety of German debt and gold. The yield on the 10-year German government bond was down 12 basis points at 0.790%, while gold futures for August delivery rose 0.4% to $1,179.90 on the Comex.
Meanwhile, Greek bonds took an absolute battering, with the yield on the 10-year up 330 basis points at 15.001%.
However, losses elsewhere in the periphery’s bond markets were nowhere near as pronounced as they had been during the euro crisis of 2011-2012, with many analysts pointing to a less worrying backdrop.
The 10-year Spanish and Italian government bond yields were up 16 and 21 basis points at 2.353% and 2.392%, respectively, while in currency markets, the euro recovered from heavy losses in Asia and early in the European session, to trade up 0.1% at $1.1179 by the close.
UBS assigned a 40% probability of contagion from Greece. This judgement is based on its assessment of three dimensions: firstly, the size of the Greek economy and its external debt; secondly, the external linkages; and thirdly, the likely policy response. “Given the relatively small scale of the Greek economy and limited external links, we suspect the key risk might be around the timeliness and credibility of policy response.” Currently, it sees around 60% probability of a swift and completely effective response from the authorities.
”We are relatively confident that Europe would be able to deliver a large policy response,” said UBS, adding that the size of the Greek economy is small, with a share in Eurozone GDP of less than 2%.
Meanwhile, Goldman Sachs said its base case remains that Greece will retain the euro.
“While still acting in response to wider market developments rather than pre-empting them, we expect ECB actions to be more prompt and more aggressive than in the past. As a result, while markets are likely to suffer in the coming days, we do not expect a repeat of the systemic and existential threats to the euro area as a whole that emerged back in 2011-12, when Greece was last centre-stage.”
Corporate news flow was scarce and eclipsed by the events in Greece.
Novartis was in focus after saying it has agreed to buy Australian biotechnology company Spinifex Pharmaceuticals.
Meanwhile, in London, shares in travel operators TUI and Thomas Cook suffered heavy losses amid concerns over tourism activity following the terrorist attack in Tunisia last week.