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.
Frequently Asked Questions about this Article…
What caused the recent share market crash and global crisis of confidence?
The article says markets slid into a crisis of confidence after reports of depositors withdrawing cash from banks in Greece and Spain, weak economic data from China (including falling home prices and rising unsold car stockpiles), and plunging bank shares such as Bankia. Those factors combined with fears of a European recession to send global share prices sharply lower.
How big was the fall in Australian shares and what happened to the ASX/S&P 200?
According to the article, more than $110 billion was wiped off Australian stocks in May, with about $35 billion lost in one day. The ASX/S&P 200 fell 2.7% (131 points) to close at 4,026.5 — its lowest level in six months.
Why did the Australian dollar drop and how much has it fallen recently?
The Australian dollar fell amid growing concerns about a European recession and a slowdown in China. The article reports it fell briefly below US 98 cents and closed at about US 98.18 cents, a six‑month low, and that it has fallen roughly 9.25% since the start of March.
What role did China’s economic data play in the market decline?
Gloomy Chinese data pushed markets lower: official figures showed home prices falling in 46 of 70 cities surveyed and a sharp rise in unsold cars. Forecasts for slower China growth (Goldman Sachs lowering its June‑quarter growth forecast and the State Information Centre projecting slower expansion) added to investor concern.
Are Australian banks able to raise funds despite the global banking stress?
The article quotes ANZ chief Mike Smith saying Australian banks are still able to raise finance on global markets. While European funding markets were described as essentially closed at that time, Asian and US markets remained open, and he said Australian banks were well placed.
Will the Reserve Bank of Australia cut interest rates to restore confidence?
Financial markets in the article expected the Reserve Bank board to deliver another interest rate cut when it met on June 5 to help restore confidence. The article also noted it was unclear whether banks would pass any cut fully on to customers.
Where are investors putting money during the slump — what are the ‘safe’ options?
Investors were retreating from sharemarkets into safe places such as government bonds, where capital is more likely to remain intact even if yields are low. The article notes the Australian government sold a new 10‑year bond at a record low yield of 3.36%, and bond futures implied yields sank to about 3.035% amid strong demand.
How could bank runs in Greece and Spain affect global markets and everyday investors?
The article warns that depositor withdrawals in Greece (about €700 million after an election left the country with a caretaker government) and reports of withdrawals from Spain’s Bankia (more than €1 billion) fuelled panic in markets. A run on banks could escalate the European crisis, increasing global market volatility and driving investors toward safe assets — a scenario that can hit share portfolios and currencies.
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