Euro fears hit global stocks hard as EU meets

Global stocks fell yesterday as European finance chiefs met to stem a sovereign debt crisis that has already upset plans by Gulf companies to raise money.

European finance officials held crucial talks amid growing concerns that the financial troubles may spread to Italy. The euro tumbled and the cost of insuring Italian government debt soared to a record as investors became worried about the ability of the euro zone's third-largest economy to repay its debts. The impact was also felt across regional markets, sending Egypt's EGX 30 down by about 2.9 per cent while the Dubai Financial Market General Index lost 1.1 per cent.

Worries over European sovereign debt issues could dissuade even some of the most well-known Middle Eastern companies from coming to market for some time, said Sapnesh Varma, the head of bond trading at Abu Dhabi Commercial Bank.

"Even though investors may like the name, they might want to wait until the dust has settled in Europe before they get into any kind of commitments for new issuances," he said. "If this is something that's going to snowball, then a lot of investors will step back and wait to see what the outcome will be before they take any position."

A flurry of bond sales in recent months had revived hopes of a sustained recovery in regional debt markets, but the widening crisis in Europe has raised some questions over the momentum of the rebound in capital markets.

Majid Al Futtaim (Maf), the Dubai malls operator, plans to raise US$1 billion (Dh3.67bn) from loans, Bloomberg News reported yesterday. Earlier the company behind Dubai's Mall of the Emirates said it had delayed a planned bond sale. Dolphin Energy, the gas production company based in Abu Dhabi, has also delayed a $1.9bn bond sale because of market uncertainty.

Despite current market jitters, some analysts point to continued demand from international investors for local bond issuances.

"I don't think you'll have the options in the bank loan market [that you would have in the bond market]. Certainly, you're not going to be able to raise the diverse investor base," said a fixed-income trader for an international bank in Dubai, who wished to remain anonymous. "You're not going to sell a Maf loan to a hedge fund in the States, but it will buy a bond at the right price. I don't see the bond markets slowing down in favour of bank loans."

Jean-Claude Trichet, the president of the European Central Bank (ECB), Jean-Claude Juncker, the chairman of the Eurogroup, and Olli Rehn, the European Economic Commissioner, met in Brussels yesterday to discuss how to contain the euro zone's debt crisis. It preceded a meeting of the euro zone's 17 finance ministers the same day.

Although officials insisted Greece would be the main topic on the agenda, anxieties about Italy darkened the backdrop to the talks.

It followed a report in Die Welt, a German newspaper, that the ECB was seeking to increase the euro rescue fund to provide support for Italy, citing unidentified "high ranking" people at central banks.

Greece, Ireland and Portugal have already combined received financial aid packages from the EU and the IMF.

After Greece, Italy has the highest sovereign debt ratio relative to its economy in the euro zone with debt estimated at €1.6 trillion (Dh8.23tn)

The country has been struggling to revive its economy, while political uncertainty surrounds the future of Giulio Tremonti, the finance minister, who has argued for severe spending cuts to cap the budget deficit. Marco Milanese, key former adviser and close confidant of Mr Tremonti, was arrested last week in connection with corruption charges.

"The unfolding political scandal could lead to a significant further repricing of Italy as the country becomes more deeply embroiled in the sovereign debt crisis," Nomura strategists said in a note.

"The potential downside [for Italian debt] is profound should the country be reclassified as a more peripheral market."

The cost of insuring Italian government debt against default using credit default swaps rose again yesterday. The spread of the Italian 10-year government bond yield over benchmark German bonds reached 279 basis points, a new euro zone peak. Yields on Italy's bonds were 5.41 per cent yesterday morning. Greece, Ireland and Portugal all required external assistance after their 10-year yields rose past 7 per cent.

Fresh debt concerns also weighed on the euro. The currency fell to a more than three-week low against the dollar, dropped against the yen and fell to a record low against the Swiss franc ahead of yesterday's meetings.

Nevertheless, Angela Merkel, the German chancellor, yesterday told reporters she had "full trust" in the Italian government's ability to reduce its budget shortfall. Italian austerity reductions would offer a "very important signal" for the stability of the euro, she added.

Finance ministers also focused discussions on a second bailout package for Greece. The country has been assured the latest tranche of a €110bn bailout needed to help save it from bankruptcy.

But Germany and other nations are keen for the second round of aid to include contributions from the private sector.

"Greece must get a new programme very quickly, in very, very short order," Mrs Merkel said.

tarnold@thenational.ae

ghunter@thenational.ae

* with reporting by Farah Halime