Global stock markets took a battering yesterday as Greece struggled to seal a €130bn (£108bn) bailout and investors took fright at more signs of faltering growth among the world's fastest-growing economies.
The rout sent London's FTSE 100 plunging 1.9 per cent to 5765.8 – its biggest one-day fall for more than two months – in a turbulent session for equity markets. Shares in France, Germany and Spain took even bigger punishment with falls of more than 3 per cent as jitters over global growth gripped dealing rooms and put Wall Street on the back foot.
London's blue-chip benchmark was in sight of the 6,000 mark less than two weeks ago, but mining and resource stocks were among the worst casualties amid mounting fears over fragile global demand. The miner Polymetal and steel giant Evraz both slumped more than 6 per cent, and the broad-based sell-off left just two Footsie stocks – the fund manager Hargreaves Lansdown and broadcaster BSkyB – in positive territory. Traders took fright as Brazilian growth slowed sharply from 7.5 per cent to 2.7 per cent last year. The disappointment came just a day after China, the world's second-biggest economy, scaled back its growth targets.
IG Index's sales trader Will Hedden said shares had been sent down by an "avalanche of pent-up selling pressure".
"With markets having spent so long near their post-crisis highs, it feels this time as if the leg downward has begun in earnest," he warned.
The sell-off came amid warnings from international bankers that the eurozone faces a disastrous €1trn blow if Greece is allowed to slide into a chaotic default.
The leaked doomsday scenario emerged from the Institute of International Finance (IIF), the body representing the banks and hedge-fund holders of Greek debt leading negotiations with Athens over the financial rescue.
It comes two days ahead of a crucial deadline for investors holding €206bn in Greek bonds to sign up to a swap cutting the value of their debt by around 75 per cent to ease the beleaguered nation's debts.
The memo warned of "very important and damaging ramifications" from a Greek default, including more bailouts for Portugal and Spain as well as €350bn pumped into Spain and Italy to prevent an even more catastrophic collapse. The European Central Bank – facing €177bn in losses on Greece – might also need to be recapitalised, it added.
But analysts said the timing of the leak smacked of an attempt by the IIF – whose 12 committee members holding 20 per cent of the bonds to be swapped have already signed up – to bring other heel-dragging investors into line. If the swap collapses, Greece will default when a €14.4bn bond repayment falls due on 20 March.
The CMC Markets analyst Michael Hewson said that the leaked document was simply a "big stick" to beat the banks and investors who have yet to sign up to the deal.
"Anybody who thinks this is the answer for Greece is living on another planet," he said. "The deal solely serves to promote vested interests in the banking sector, as hardly any money is going to help Greece's economy."
Ideally, Greece wants 90 per cent of investors to sign up to the swap, although the country's Finance Minister, Evangelos Venizelos, has set a 75 per cent threshold to go ahead with the deal. With between 75 per cent and 90 per cent taking part, Athens could also decide to press ahead, activating "collective action clauses" (CACs) to force recalcitrant investors to participate. Below 67 per cent would be a disaster as the CACs cannot be enforced, although unofficial estimates suggest participation in the low 70 per cent.
The Lloyds Bank Corporate Markets analyst Eric Wand said: "Our central scenario remains that Greece will not achieve the 90 per cent voluntary participation but it will meet the 66.67 per cent acceptance thresholds."