Greece refuses to pay debt, sends world markets down

Sharemarkets around the world have slumped in reaction to the Greek financial crisis but there are no signs of global panic.

In the latest developments, the Greek government and European leaders have urged a Yes vote in this weekend’s referendum, which will decide whether the population will accept further austerity measures in return for continued bailouts.

The left-wing government of Prime Minister Alexis Tsipras has indicated it will not meet a payment of €1.55 billion ($2.4 billion) owed to the International Monetary Fund (IMF) and due today.

In addition, Greece faces further debt payments of €2 billion on July 10 to bond holders and a further €454.3 million on July 13 to the IMF.

The scale of this debt, the country’s inability to pay and the government’s refusal to take measures demanded by lenders, who are mainly European Union governments, are behind the crisis.

Greek banks are closed for the week, the sharemarket is also closed, controls have been imposed to prevent capital flight and Greeks are limited to withdrawing €60 a day in cash withdrawals.

Effectively, Greece has been let loose from international rescue loans for the first time in more than five years.

Protesters rally in Athens
Meanwhile, protest crowds in Athens are rallying for a No vote, which could mean a rejection of Greece’s membership of the European Union and the eurozone.

This uncertainty, rather than the size of the Greek economy, is driving markets down. But the broader impact is limited because Greece is no longer so enmeshed in the region’s financial system.

Bonds in Italy, Spain and Portugal – highly indebted countries seen as vulnerable to shocks from Greece – weakened, though the moves were modest relative to the heavy selloffs seen during previous bouts of the crisis.

However, Greek bonds have collapsed, with the two-year yield soaring above 35%, a rise of nearly 15 percentage points.

No longer a threat to world markets
The relative calm reflects investors’ growing confidence that a Greek crisis no longer poses an existential threat to the eurozone. The European Central Bank’s bond-buying programme, launched in March this year, provides a backstop for government debt markets.

The EU’s main priority is to avoid contagion from spreading to other parts of the 19-country eurozone.

The euro tumbled to more than a three-week low against the US dollar during the Asian trading session, before recovering in European trade. It was 0.2% higher on the day at $US1.1188 in late trading in Europe. The currency remains 1.8% higher so far in June.

In Europe, the pan-European Stoxx 600 closed 2.7% lower in its biggest one-day fall since October, wiping out most of the previous week’s rally.

But this is insignificant compared with the summer of 2011 when the Stoxx Europe 600 index fell more than 20% between July and September.

Wall Street closed down with the Dow falling 350.33 points, or 2.0%, to 17,596.35 and erasing most of its gains this year. The S&P 500 index lost 43.85 points, or 2.1%, to 2057.64 and the Nasdaq Composite Index was down 122.04 points, or 2.4%, to 4958.47.

Effects on Asian markets
The New Zealand and Australian sharemarkets also tumbled yesterday. 

In New Zealand, the S&P/NZX 50 fell 50 points, or 0.9%, while Australia's S&P/ASX 200 index dropped 2.2%.

Stock advisers urged investors who want to take advantage of lower prices to target defensive companies, those exposed to US markets and those that do not depend on capital markets.

In Japan, the Nikkei 225 Stock Average lost 2.9%. The yen strengthened 1.7% against the euro, as investors piled into the Japanese currency, which is considered a safe-haven in times of financial stress.

China's sharemarkets lost 3.3% but were mainly affected by local factors such as high investor debt and a slide of 20% over the past two weeks, bringing it into bear territory.