Fears that Spain might need a sovereign bailout bigger than the already-promised 100 billion euros for its banks, as well as concerns that Greece will not meet the conditions of its bailout knocked down emerging market stocks in Asia on Wednesday, despite good news in the region itself.
Markets fell despite the world's third biggest IPO of the year, Malaysian hospital operator IHH Healthcare, surging 14 percent at its debut on Wednesday and China’s eagerly-awaited HSBC flash PMI index hitting a five-month high on Tuesday.
Reputed economists warned that policymakers in the eurozone must agree on sorting out the crisis once and for all as a matter of urgency, saying that “as of July 2012 Europe is sleepwalking towards a disaster of incalculable proportions.”
“Over the last few weeks, the situation in the debtor countries has deteriorated dramatically. The sense of a never-ending crisis, with one domino falling after another, must be reversed,” the economists, members of the Institute for New Economic Thinking’s Council on the Eurozone Crisis, wrote in a report.
All European nations that were parties to the euro’s “flawed design, construction and implementation” have the responsibility to contribute to a solution and “a successful crisis response must be collective and embody some burden sharing across countries,” the economists said.
“Convincing steps” towards a banking union should be taken, and a plan to cut debt over the medium term backed by temporary guarantees should be implemented, which should give the European Central Bank (ECB) “room to act more forcefully in the market for sovereign debt and also for communicating to the market that this tool will be used actively,” they added, essentially calling on the ECB to buy more Spanish and Italian debt.
The Institute for New Economic Thinking is sponsored by famous billionaire investor George Soros and the report was signed by 17 economists, including Patrick Artus, global chief economist at NATIXIS and Erik Berglof, chief economist and special adviser to the president, European Bank for Reconstruction and Development (EBRD).
LOW RISK APPETITE
On Wednesday, the EBRD cut its growth forecasts for its countries of operation, citing the eurozone crisis and a downgrade in Russia’s outlook as the main reasons for the move.
The escalation of the eurozone crisis, as well as a marked slowdown in global growth have undermined investors’ appetite for risk, John Higgins, an economist with Capital Economics, wrote in a research report.
Some analysts are looking to the Federal Open Market Committee’s (FOMC) meeting scheduled for next week to see whether the US central bank will commit to buying more assets from the financial markets to ease monetary policy further.
But Higgins said even this would be unlikely to help the markets.
“Looking ahead, we doubt a third round of quantitative easing from the Fed would whet investors’ appetite for risk,” he wrote. “Depressed valuations could lend support to stock markets in some countries, but we doubt they will prevent further falls in many.”
“The prices of most commodities should also come under fire, especially if, as we suspect, the dollar gains more ground against the euro,” he added.
Low oil prices would hit Russia, which is already facing economic slowdown, with the Economy Ministry saying on Wednesday on its website that gross domestic product increased by 3.8 percent year-on-year in June against a 4.2 percent rise in May.
BEGGING OF A TREND
The Economy Ministry estimated earlier that economic growth slowed to 4 percent in the second quarter from 4.9 percent in the first quarter, according to a report by Reuters.
“Of course, the fact that the Russian economy slowed in the second quarter is already old news. What is more worrying is that it looks likely to be the beginning of a new trend rather than a temporary pause for breath,” Capital Economics emerging markets analyst Liza Ermolenko said.
“After all, even consumer-facing sectors, which have been the key driver growth so far, are starting to see the first signs of a slowdown,” Emolenko added.
However, not all analysts are pessimistic on the outcome of the eurozone crisis, with ING’s Simon Quijano-Evans saying that eurozone governments have acted to contain it and the ECB is doing its part, and this helps to bring down volatility.
September could be “the ultimate hurdle,” with the German Constitutional Court deciding on the eurozone’s permanent bailout fund, the European Stability Mechanism, Dutch elections and expected policy action from the FOMC, Quijano-Evans added.
The euro and European stocks got a boost on Wednesday afternoon from comments from ECB council member Ewald Nowotny that the ESM should be given banking license – which would allow it to leverage its balance sheet and therefore get more firepower – but analysts told Reuters the enthusiasm in the markets will be short-lived.