Norris in warning on global crisis

The nation's most senior banker said global money markets "effectively froze" this week as Germany failed to roll over the entire stock of ?6 billion ($8.2 billion) in long-term bonds. His comments came as the leaders of the euro zone's key economies France and Germany met in Austria overnight to resolve differences over how to handle Europe's debt crisis.

Mr Norris, who retires next Wednesday after more than six years in the role, warned that credit crunch conditions were returning, and were threatening to choke off funding for banks around the world.

"I would have to say that this has potential to be significantly worse than the Lehmans [fall] and the subprime crisis because this is now we are talking about nation states," Mr Norris told BusinessDay yesterday.

"If you have a situation like you had today where markets had effectively frozen then it doesn't matter how good your name is, you are not going to be able to access markets," he said.

"As of today no banks could access these markets."

The Westpac chief, Gail Kelly, also expressed fears about the fragile situation and urged Europe's regulators to get on top of the crisis.

"Clearly what's happening in Europe is a major concern and not improving," she told BusinessDay. "The various authorities in Europe actually have the capacity to deal to these issues - I certainly wish they'd get on with it and do it."

The sharemarket ended slightly lower yesterday, but performed better than its US and European counterparts. The benchmark S&P/ASX 200 index fell for the fifth day in a row, giving up 6.8 points to 4044.2. The Australian dollar traded near a seven-week low and was at US97.09? last night.

The stresses on global money markets mean the costs of raising wholesale funds for banks were significantly elevated, Mr Norris said.

One of the biggest wake-up calls for European policymakers occurred early Thursday morning as Germany, the region's powerhouse, suffered probably its worst bond auction ever.

Debt markets were shocked by the news that more than a third of the so-called Bunds went unsold in an auction of ?6 billion of 10-year debt. The poor sales result stoked fears that Germany was being dragged into the crisis.

One German politician warned that the country was being "drawn into the debt swamp".

The head of fixed income at Aberdeen Asset Management, Vince Rodriguez, said, "It's the first sign that the contagion, the fears that we have, are spreading not only to France, but to Germany."

The French President, Nicolas Sarkozy, was scheduled to meet the German Chancellor, Angela Merkel, for further talks on the euro zone crisis.

Although Germany's bonds remain expensive, the poor outcome of the auction was a clear message that investors were rejecting exposure to the euro. This is only likely to intensify near-term expectations of a possible break-up of the region, something the euro zone members are firmly against.

"The risk is rising further that these stresses spread outside of European countries, including Australia," the ANZ's chief economist, Warren Hogan, said.

"Indeed, the two key transmission mechanisms to Australia from this European crisis - China and funding pressures - are now worsening."

The German jitters follow Europe's second biggest economy, France, coming under pressure. Questions are being raised over its triple-A credit rating, pushing up its borrowing costs, which have also risen for others, including Spain.

The Australian government's borrowing costs have fallen to record lows as investors seek a haven from the European turmoil. The benchmark 10-year yield yesterday dropped to a record low of 3.81 per cent.

with Lucy Battersby

Inside

Debt markets are in danger of locking up

Malcolm Maiden, Page 6

Stocks report

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