European rumble echoes on ASX

As European debt markets approached stress points not seen since the peak of the global financial crisis, the benchmark S&P/ASX 200 Index yesterday plunged 3.7 per cent to 4038.5 points.

Sharemarkets in Europe had also tumbled in early trade, recording falls of more than 2 per cent, amid investor fears that the region's political leaders would fail to break the impasse over how to manage a likely default by Greece.

Credit markets now expect Greece will default on its debt at some point, and investors are hoping for an orderly default in which the big European banks are protected.

But after more than 18 months of complex negotiations among the region's politicians, regulators and bankers, many investors are doubtful there will be an agreement that is palatable for Greece and its creditors.

These fears drove the euro to a fresh 10-year low against the yen, while the Australian dollar tumbled US3.21? against the US dollar to close at $US1.0307, after touching a one-month low of $US1.0278.

After the German government hinted at the prospect of a Greek default, Westpac chief currency strategist Robert Rennie said there were few options but a default if an agreement could not be reached. "European authorities seem to be hardening their position towards Greece," Mr Rennie said. "I get the sense that Europe is basically saying 'we are getting close to that point where enough is enough'."

Despite there being few direct trade links between Australia and Europe, the fear of a default took a hefty toll on blue-chip stocks the big banks were down and miners BHP Billiton and Rio Tinto lost close to 4 per cent.

A portfolio manager for Platypus Asset Management, Simon Bonouvrie, said the plunge had the feel of "panic selling" and investors were responding to the major challenge facing Europe's policy markets.

"A resolution could take years, so the markets are selling first and asking questions later," he said.

In another worrying sign for investors, credit markets in Europe are also becoming increasingly edgy about lending to big borrowers. Credit default swaps which measure the default risk of a borrower are approaching three-year highs for Europe's biggest corporate bond issuers.

A credit analyst at Deutsche Bank, Colin Tan, said the spreads on credit default swaps for European financial and sovereign issuers had blown out to record highs.

"The credit risk premiums for West European sovereigns and financials are now wider than post-Lehman levels," Mr Tan said.

Further inflaming market hysteria, ratings agency Moody's is rumoured to be mulling a ratings downgrade for three of France's biggest banks, all of which hold Greek government debt.

On the S&P/ASX 100, the worst-performing stock was Cochlear, which plunged 20.3 per cent, or $14.68, to $57.50, after it announced it would recall of one of its hearing implant ranges. The implant manufacturer led the healthcare sector the weakest on the market to close 5.1 per cent lower.

Insurer Suncorp was the weakest stock in the top 20. Its shares lost 5.7 per cent, or 47?, to $7.85.

Financials fell 3.9 per cent, with big losses at all the major retail banks. Westpac shed the most value of the big four, falling 4.6 per cent to $19.20.

The big miners fell on the back of lower commodity prices overseas: BHP fell $1.46, or 3.9 per cent, to $36.45 and Rio lost $3.05, or 4.3 per cent, to $68.20.

Gold stocks were among the few that gained on the day, with AngloGold Ashanti rising 6.4 per cent to $9.17. Australia's biggest goldminer, Newcrest Mining was the best performer in the top 20, falling 0.15 per cent to $39.80.