New York - Renewed worries over the European debt crisis have sent markets lower and further devalued the euro.
Investors, who had started the week reassured by the huge rescue of Europe's indebted nations, have expressed concerns that the austerity measures demanded by the bailout would stunt the continent's already anaemic economic growth.
The euro fell to its lowest level in 18 months on Friday, and one by one, markets across Asia, Europe and then the United States sank lower under the renewed pessimism about European growth caused by governments cutting back spending.
Investors continued to depress the price of oil, as traders bet on slower global growth and continued to push up gold, an asset perceived by investors as a safer, long-term store of value in times of stress.
The sharp worldwide market decline came only five days after the European Union and the International Monetary Fund hoped their US$957 billion (S$1.3 trillion) rescue package would signal a 'shock and awe' commitment to ending the continent's crisis.
But economists said that while the package had eased concerns that countries like Greece would encounter trouble in rolling over old debts or borrowing new money, it had done nothing to help them grow.
There was also a growing worry on Friday about how governments would find the billions needed to pay for the rescue package, economists said, and a growing suspicion that central banks might eventually resort to allowing inflation to lessen groaning debt loads.
Some economists regard that step as a troubling departure from the European Central Bank's (ECB) mandate to focus solely on price stability, and as a result, is adding to the pressures undermining the euro.
A continued hammering of the euro would make European exports cheaper, but the side effect would be weaker American exports, potentially dragging the US - and the rest of the world - back towards recession. Since the start of the year, the euro has fallen by 13 per cent against the dollar.
'What you get is markets worrying about a whole cascading of weakness stemming from Europe being transmitted through the euro to the United States,' said Mr Martin Murenbeeld, chief economist at DundeeWealth Economics.
In the US, the Dow Jones Industrial Average, which had been seesawing since the rescue package was announced on Monday, declined 162.79 points, or 1.51 per cent, to 10,620.16 on Friday.
Bank stocks led the market decline, mainly over worries about Europe. Another factor might have been the Senate's approval of a proposal on Thursday that could cut bank revenue by imposing limits on fees they can charge businesses to process debit card transactions. The Senate also approved an initiative to end reliance on major credit rating agencies, putting further pressure on financial stocks.
In Paris on Friday, stocks slumped 4.6 per cent; in London, the FTSE 100 lost 3.1 per cent; and in Germany, the benchmark DAX index lost about 3.1 per cent. Spain's stock market fell by 6.6 per cent.
ECB president Jean-Claude Trichet was quoted yesterday as saying that the euro was not under attack by speculators and described as 'nonsense' any suggestion that euro zone governments had forced the central bank to act, sending out a fatal signal on its independence and credibility.
Source: Sunday Times, 16 May 2010