European jitters take a $45 billion toll on sharemarket

Sentiment turned deeply bearish among local investors. More than $45 billion has been wiped off the Australian market's value after two days of heavy losses, with banks in the firing line.

The S&P/ASX 200 Index ended yesterday nearly 2 per cent lower, yesterday matching losses across Asian markets. European markets fell sharply on Monday night and on Wall Street the Dow Jones Industrial Average dropped 1.2 per cent, dampened by weak economic data.

"Clearly there's a concern with the European situation at the moment and not so much about about Greece and its inability to fund its own debt issue, but more so what is looming with some of the other European countries Italy in particular," said Justin Gallagher, head of sales trading at investment bank RBS.

At the close, the S&P/ASX 200 was down 86.9 points at 4495.4. The dollar was caught in the selloff and dropped more than US1? to trade last night at $US1.0532.

Banks led the Australian market lower and major resource stocks were also off sharply. Coalminers, however, bucked the trend after a $4.7 billion bid for Macarthur Coal.

National Australia Bank, which has the largest exposure to Europe among the local lenders, had its biggest one-day fall since November, falling 3.7 per cent to $23.88. Losses in ANZ and Westpac were more than 2 per cent while Commonwealth Bank was down 1.8 per cent. Investment bank Macquarie Group tumbled 6 per cent to $28.22, slipping below $30 a share for the first time since March 2009.

While Australia's banks were able to stand on the sidelines when it came to Greece given their minuscule links to the troubled economy, they are sweating a little more as Italy comes under the spotlight, with their exposure to the country running to billions of dollars.

The latest figures compiled by the Bank of International Settlements show Australian banks have a $US3.3 billion ($A3.09 billion) exposure to Italy through bonds and loans. Their exposure to Spain is $US4.2 billion.

After weeks of uncertainty over bailouts for Greece, the Italian benchmark share index crashed 3.8 per cent on Monday as fears mounted it could become the next victim of the sovereign-debt crisis.

Italian government borrowing costs hit 5.7 per cent, their highest in more than a decade, while the yields on Spanish government bonds reached 6 per cent the highest level since the creation of the euro.

Italy is widely regarded as having a weak economic position with its debt-to-GDP ratio of 120 per cent at the end of 2010, the second highest in the euro area after Greece. Its track record on growth is lacklustre, with real GDP growth averaging 1.4 per cent over most of past decade.

German Chancellor Angela Merkel told Italian Prime Minister Silvio Berlusconi to ensure Italy's parliament approved an austerity budget to send "a very important signal" to the markets.

Meanwhile, political leaders and bankers in the Greek debt talks remained unable to agree on how to avert an outright default by Athens.

The 17 governments of the euro zone pointedly failed to rule out a sovereign-debt default by Greece, although the European Central Bank later

released a statement that "confirmed its position that a credit event or selective default should be avoided".

Mr Gallagher said a

string of economic data was due out in the US over the next few days, including Federal Reserve chairman Ben Bernanke's six-monthly monetary policy testimony later tonight, which will give investors critical insight into the health of the economy there.