London: European shares fell on Monday after a regional election defeat for German Chancellor Angela Merkel and a cancellation of a US visit by Greek Prime Minister George Papandreou to chair a cabinet meeting raised investor concerns over the region’s debt crisis.
Banks, which have a significant exposure to the peripheral euro zone countries, were among the hardest hit, with the sector index down 2.7%. Societe Generale fell 6%. UBS dropped 1.5% after increasing the amount it said it had lost on rogue equity trades to $2.3 billion.
At 1:59pm, the FTSEurofirst 300 index of top European shares was down 1.9% at 919.92 points after rising in the previous four sessions. It rose 0.6% on Friday, the highest close in more than a week.
But caution has returned as EU finance ministers failed to come up with a constructive solution to deal with the debt crisis over the weekend. One Greek media report said Greece’s international lenders presented a list of 15 austerity measures Greece needed to accelerate as a condition for disbursing a next tranche of bailout funds.
The defeat of Merkel’s conservatives by Social Democrats in a regional vote on Sunday ahead of a key euro zone vote in parliament in two weeks’ time also made markets nervous. These political setbacks have prompted investors to exit equities and move to bonds and cash.
“The whole market is driven by uncertainties. There is more and more opposition to what Merkel wants to do. The worse it gets, the more she follows the German line as opposed to the European line,” said the head of investment dealing at a fund management company that manages $80 billion.
“It can’t be good news for Europe. Social Democrats may be pro-Europe, but they are pro-Germany first.”
He said his fund company was happy to have fewer equities, more bonds and some cash at the moment, adding that people were long government and corporate bonds and overall cash holding was relatively higher than usual.
FOCUS ON GREECE
Analysts said that eroding the mandate for Merkel’s ruling coalition could lower Germany’s resolve to help highly-indebted countries such as Greece, which could find it difficult to rein in spending to meet targets. This in turn could see the next tranche of bail-out funds withheld, analysts said.
Greece had sufficient cash to keep going until mid-October but with this deadline fast approaching, investors will start looking at ways to take risk out of portfolios and that might put severe pressure on financial stocks, they said.
The IMF representative to Greece Bob Traa said the country must implement reforms agreed under an EU/IMF bailout plan and improve tax collection. Greek Finance Minister Evangelos Venizelos said that cutting spending would be a priority of the 2012 budget.
But analysts said that the markets were losing faith in politicians.
“It’s no more a link between markets and economics, but a link between markets and politics. The politicians should have seen the crisis coming and done more, but the problem is they are not proactive,” said Koen De Leus, strategist at KBC Securities in Brussels.
“We are just going from one crisis to another. It’s a nightmare for the markets.”
Investors are waiting for a meeting of the Group of 20 countries in Washington on Thursday and Friday where the challenge will be to prevent a sovereign debt crisis centered in Greece from turning into a full-blown banking crisis.
Such a crisis could engulf other indebted European countries, lead to messy defaults and plunge the region and world back into economic and financial turmoil.
In this climate, fund mangers said that investors should focus on companies having strong yields and look for interesting companies in defensive sectors such as utilities.
The market is also waiting for this week’s meeting of the US Federal Reserve, which could announce further policy easing moves to stimulate the sputtering U.S. economy.