Markets are clearly responding very negatively to EU’s message that they’re reviewing private sector involvement in Greece’s second bailout. There are also additional concerns on contagion after Moody’s warned of Franco-Belgian financial groups Dexia’s exposure to Greece. Banks shares led European stocks lower with FTSE down -2.7%, DAX down -3.3%, CAC down -3.3% at the time of writing. US stocks also open lower with DOW quickly losing over -180 pts within 20 minutes. Commodities also tumble with CRB index losing another -2.1 pts and is heading closing to 290 level. More importantly, note that Crude oil finally takes out 75.71 key near term support level which should now pave the way to 70 psychological level. Fed chairman Bernanke vowed in his testimony to Joint Economic Committee that Fed is prepared to take further action as needed. But that provides no relief to markets.
Dollar index reaches as high as 79.82 so far and is on course to 80 psychological level. In the currency markets, EUR/USD is struggling to regain 1.32 so far and recent decline should still be in progress for 1.30. Australian dollar is the weakest one on risk aversion and pressured as RBA turned dovish. Sterling is catching up after disappointment from construction PMI data. Yen remains firm, along with dollar.
Jean-Claude Juncker, president of EU finance ministers hinted after the EU finance minister meeting that they’re reviewing private sector involvements in Greece’s second bailout and there are needs for “technical revisions”. However, he didn’t elaborate further and that left markets wondering if there will be a push for bigger private sector writedowns. There were talks that the writedown could be raised from previously agreed 21% to as much as 50%. There are also talks that a proposed debt exchange would see existing bonds swapped for new bonds with longer maturities and lower yields than planned.
Moody’s warned yesterday that Franco-Belgian financial group Dexia had experienced further tightening of its access to market funding and that it could cut its A3 long-term rating. It’s estimated that Dexia, which received EUR 6b bailout from Belgium and France back in 2008, is holding EUR 3.8b of Greek sovereign debts and had a credit risk exposure of EUR 4.8b. Dexia pledged to clean up its balance sheet today while Belgian finance minister Didier Reynders said France and Belgium governments are ” following the situation and will intervene if necessary”.