Oil and shares hit by Greek crisis

Traders sold Spanish and Italian government bonds and dumped the euro as worries loomed of a break-up of the 17-nation single-currency bloc. Reuters

Oil and shares tumbled yesterday as fresh fears of a Greek exit from the euro zone hit world markets and Athens called a new election for next month to try to end its political impasse.

Traders sold Spanish and Italian government bonds and dumped the euro as worries loomed of a break-up of the 17-nation single-currency bloc.

With shockwaves reverberating around world markets, the euro fell as much as 1.32 per cent to US$1.2681, its lowest level against the dollar since January.

Brent crude futures sank 55 cents to $111.69 per barrel, while Nymex crude futures fell $1.05 to $92.99, hitting their lowest level since October.

Despite efforts to boost banking-sector liquidity by the European Central Bank and an increase in the size of the continent's so-called firewall, Europe had faced a significant setback in its efforts to resolve Greece's debt dilemma, said Mark Watts, the head of fixed income at the National Bank of Abu Dhabi. "We're resetting to where we were in Q4 last year, to where people are saying that there's contagion in the system."

The UAE's markets were also hit, with the Dubai Financial Market General Index closing down 1.3 per cent at 1,466.08 and the Abu Dhabi Securities Exchange General Index falling 0.2 per cent to 2,467.21.

All other markets in the Middle East fell, with the exception of Bahrain, Oman and the Palestinian Territories. Gulf states had built up capital buffers as a result of high oil prices during the first quarter, leaving themselves better positioned than previously to withstand market turmoil, said Jean-Michel Saliba, the Middle East economist at Bank of America Merrill Lynch.

However, Dubai's economy was looking increasingly precarious as Europe's worries intensified, he added. "Until now, all indicators were posting quite positive readings, such as international arrivals at the airports and good results at companies such as DP World," he said. "But if things continue like this, I'd expect there will be a slowdown."

Elsewhere in the world, shares fell sharply. Hong Kong's Hang Seng fell 3.1 per cent in the early hours to 19,259.83, while Japan's Nikkei 225 Index dropped 1.1 per cent to 8,801.17. The MSCI Emerging Markets Index was down 0.6 per cent to 946.1, having fallen during eight of the last nine trading sessions.

Yields on Italian bonds, which move in the opposite direction to price, rose as high as 5.994 per cent, their highest level since the start of the year.

The difference between the yields on Spanish and German bonds rose to more than 5 percentage points, a euro-zone record, as investors dumped the debt of peripheral countries for the solid European core.

The sell-off in Europe eased as the day progressed, eventually reversing losses. Britain's FTSE 100 fell as much as 1.5 per cent to 5,354 before erasing some of its losses, while stocks in the United States opened lower on Wall Street.

With markets in turmoil, Greeks are said to have withdrawn about €700 million (Dh3.27 billion) from banks since May 6 in the expectation of a rapid depreciation if the country exits the euro zone, Reuters reported yesterday, citing minutes of the meetings of the Greek president, Karolos Papoulias, with political leaders.

Greece's leading political parties failed to form a government this week after pro-austerity parties received a drubbing at the polls on May 6, forcing Mr Papoulias to announce an interim unity government until a new election takes place next month.

Greek voters want an end to the widely unpopular austerity measures, while demanding that the country remain part of the euro zone - a position many in the market believe to be incompatible.

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