GLOBAL financial markets have slid into a crisis of confidence, with depositors reportedly pulling their money out of banks in Greece and Spain, and Australia's share prices crashing yesterday in their biggest fall of the year.
More than $110 billion has been wiped off the value of Australian stocks in May, with $35 billion stripped from share values yesterday alone. The ASX/S&P 200 index fell 2.7 per cent or 131 points to close at 4026.5, its lowest level for six months.
The Australian dollar fell briefly below US98? before closing local trade at US98.18?, also a six-month low. It has fallen 9.25 per cent since the start of March, amid growing concerns about recession in Europe and a slowdown in China.
Gloomy data from China sent markets down further yesterday afternoon. Official figures showed home prices falling in 46 out of 70 cities surveyed and stockpiles of unsold cars rising sharply. Goldman Sachs lowered its June quarter growth forecast from 8.6 to 8.1 per cent, while economists from the China's State Information Centre forecast growth to fall to 7.5 per cent.
Federal Treasurer Wayne Swan last night issued a reassurance that prospects for Australia and the region remained healthy. But Mr Swan spent much of the afternoon and night on the phone with other finance ministers, debating what steps could be taken to restore confidence.
Australia is seen by global markets as a fair-weather investment. Money piles in here when times are good, and moves out when times are bad.
The plunge so far bears no comparison to the panic of September 2008, but with no light showing in Europe's tunnel, the future is uncertain.
Financial markets believe the Reserve Bank board will deliver another interest rate cut to restore confidence when it meets on June 5. It remains to be seen whether the banks will pass on all the cut to customers.
ANZ bank chief Mike Smith said Australian banks were still able to raise finance on global markets. "European funding markets are essentially closed at the moment because of the uncertainty in Europe, however Asian and US markets remain open", he said. "Australian banks are well placed right now".
Mr Swan said Australia's fundamentals remained solid.
"We have rock-solid public finances, one of the strongest financial systems in the world, low unemployment, solid growth, a massive pipeline of investment over long-term horizons, a reaffirmed AAA credit rating from all three global ratings agencies, world-class regulators, and a proven track record of dealing with global instability," he said.
Yesterday's market plunge was part of a global slump, after a report that nervous investors in Spain withdrew more than ?1 billion on Thursday from the troubled Bankia group.
The Spanish government, which has taken over the bank, denied the report, but shares in Bankia slumped 30 per cent.
Earlier, the head of Greece's central bank said depositors had taken ?700 million (about $A900 million) out of Greek banks after the May 6 election left the country without an elected government.
A run on the banks would create a serious risk that the European crisis could spiral out of control. The Greek crisis has left no one in charge, just a caretaker government that has no ability to borrow the funds its banks might need to survive.
Overnight in Europe, Moody's cut the ratings of 16 Spanish banks, citing the country's deepening recession and increasing losses on real estate loans. Fitch Ratings dumped Greek government bonds into a C-class rating, saying the Greek election results showed a lack of public and political support for the austerity pact the previous Greek government had negotiated with European authorities.
Investors are retreating from sharemarkets to park their money in safe places, such as government bonds, where their capital will remain intact even if the yield is low.
On Wednesday, the Australian government sold a new tranche of 10-year bonds at a record low yield of just 3.36 per cent, compared with 5.48 per cent a year ago. But yesterday the demand for bond futures was so intense that the implied yield sank to 3.035 per cent.