Greece on brink puts global markets on the edge

With European mandarins hemming and hawing over the release of a second tranche of bailout funds to Greece, equities across the globe snapped lower, even as Dexia, a Belgian-French bank, came under attack from speculators.

The failure of Greece to meet austerity measures forced euro zone finance ministers cancel a meeting for disbursement of additional funds which would have taken place on October 13. Tuesday’s decision would likely delay an €8 billion (Rs52,280 crore) in funding for the Greek government, which, in turn, said it has sufficient cash to meet needs till mid-November.

Closer home, a rating downgrade of the State Bank of India by Moody’s investor services stunned players, and added to the selling spree which clipped the Sensex by 1.77% or 286 points to 15,864.86 on Tuesday. The National Stock Exchange Nifty wound up at 4772.15. Indian markets have fallen around 5% in the last three sessions. In the United States, Federal Reserve chairman Ben Bernanke said the Fed was prepared to take further steps to help a fragile recovery held back by a weak job market and financial stresses in Europe.

“I think more people are getting more afraid,” Tony Nunan, a Tokyo-based risk manager at Mitsubishi Corp, told Reuters. “There’s a concern that there will be a mini financial crisis. If they don’t do it properly, it will cause some banks in Europe to fail, and there will be a domino effect,” he said, referring to European leaders’ efforts to resolve Greece’s crisis.

Gopal Agrawal, chief investment officer at Mirae Asset Global Investments (India), is looking out for signs of liquidity crises in Europe which could potentially spread to the rest of the world.

“The success of the European Financial Stability Fund or EFSF, the interbank lending and borrowing system and the smooth flow of global liquidity will be keenly watched,” he said.

A prolonged weakness will hurt companies’ ability to meet fund raising requirements said Anand Shah, CIO at BNP Paribas Asset Management Company.

“In the near term, Indian markets would continue to move in sync with Europe. Weaker equity markets are bad for the economy as risk aversion and weak sentiment affect capital inflows,” he said.

Foreign institutional investors were net sellers by Rs971.44 crore on Tuesday according to provisional exchange data. They have been net sellers by Rs2001 crore so far in 2011, according to data from the Securities and Exchange Board of India.

Domestic factors such as high interest rates and wage inflation are also hurting. “There is uncertainty on earnings due to the global slowdown and the correction in commodity prices, which will affect the commodity companies in the listed space,” said Agrawal.

Commodity prices have been correcting in anticipation of a global slowdown which would result in lesser demand for raw materials from companies.

Large governments are unlikely to help ease the pain, according to experts who point out that the United States, the world’s largest economy, and China, the No. 2, are in election mode.

Americans have faced opposition to continued infusions of liquidity, while China is tightening belt to control inflation. But the main issue to watch would remain the resolution of the European situation.

“The longer the uncertainty prevails, the worse it would get for equity markets,” said Shah.