Global growth, Greek concerns hit stocks

Concerns over global growth and whether or not Greece can gain enough support to avoid a default hit markets hard today. US stocks took a big hit today as concern for Greece grows as they approach a critical deadline and as leaders in China announced that they have lowered their economic growth target.

March 6, 2012 10:29 AM ET
By PAN PYLAS
MSN Money

LONDON (AP) - Worries about global growth and uncertainty over whether Greece can muster enough support in a crucial bond swap with private creditors hit stocks hard on Tuesday.

Having rallied over the past few months, stocks seem to have run out of steam, with the more bearish investors warning markets have risen too far too soon.

One of the reasons why market sentiment has noticeably improved this year has been an easing in Europe's debt crisis after the European Central Bank's decision to make around a trillion euros available to the banking system.

Concerns over a debt default by Greece have at times tested market sentiment — on Tuesday, investors were fretting once again over the country as a key deadline approaches.

On Thursday, results are expected on the level of participation in the country's bond swap. The so-called Private Sector Involvement, or PSI, is an integral part of Greece's second bailout, without which the country could default, sending shockwaves through financial markets and dragging on the world economy.

Even though the banking group leading negotiations on behalf of the creditors said on Monday that 12 of the largest investors have committed to participating in the plan, investors remain concerned that not enough will back the deal, which aims to wipe a little over euro100 billion ($132 billion) from Greece's debt burden.

"At the risk of being cynical there remains a long way to go given that these particular banks account for only 20 percent of the available bonds covered in the PSI agreement," said Michael Hewson, markets analyst at CMC Markets.

Private creditors have been asked to accept to swap their bonds with new ones worth 53 percent less in face value and with longer maturities and lower interest rates. Some creditors, including hedge funds, are thought to be weighing up the benefits of holding out for a potentially bigger insurance return.

If the takeup is below 90 percent, but still above the crucial 66 percent threshold for the deal to go ahead, the Greek government could force holdouts to accept the swap. That may be considered a credit event, meaning bond insurers would have to pay the Greek bondholders.

Private creditors have until Thursday night to decide whether or not they will participate, unless the deadline is extended. Failure of the deal would mean the country could default on its debts on March 20, when it faces a euro14.5 billion ($19.2 billion) payment on bonds, unless some other drastic solution is found. If the swap goes ahead, the country would not have to repay that amount on that date.

Continuing to weigh on sentiment was Monday's announcement from China's premier Wen Jiabao that the country was targeting a lower growth rate of 7.5 percent, compared with 8 percent before. While that had been largely widely anticipated, it has prompted some traders to fret about the state of the global economy.

"Concerns over China's slower growth forecasts are heavily weighing on investors' minds," said Simon Furlong, a trader at Spreadex. "With China being the world's main exporter, their growth figures give a great deal of insight into the global demand, which is clearly struggling as China can't find enough buyers to support the kind of growth it was hoping for."

In Europe, the FTSE 100 index of leading British shares was down 1.6 percent at 5,779 while Germany's DAX slid 2.6 percent to 6,687. The CAC-40 in France was 2.6 percent lower too at 3,395.

The euro was also under pressure, trading 0.7 percent lower at $1.3124.

In the U.S., the Dow Jones industrial average was down 1.1 percent at 12,815 while the broader Standard & Poor's 500 index fell 1.3 percent to 1,347.

Over the past few weeks many of the world's major markets have pushed above levels last seen last summer. On Wall Street, the U.S., the gains have been even more pronounced. The S&P 500 index is trading double its bear market low of 666 of March 2009.

Economic indicators will be in focus over the rest of the week, not least out of the U.S., where a busy few days culminate with Friday's nonfarm payrolls data. The jobs figures often set the market tone for a week or two after their release.

Earlier in Asia, mainland Chinese shares saw their biggest loss in almost a month a day after the lowering of the country's economic growth target. The benchmark Shanghai Composite Index lost 1.4 percent to 2,410.45 while the Shenzhen Composite Index for China's second smaller stock market lost 1 percent to 971.8.

Elsewhere, Japan's Nikkei 225 index dropped 0.6 percent to 9,637.63 and South Korea's Kospi shed 0.8 percent to 2,000.36. Hong Kong's Hang Seng lost 2.2 percent to 20,806.25

Oil prices fell amid the growth worries — benchmark crude for April delivery dropped $1.81 to $104.91 a barrel in electronic trading on the New York Mercantile Exchange.

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