Global nerves return

Thump. That crashing sound you heard this morning was the Australian sharemarket slumping more than 2% just after trade opened this morning. That whooshing sound was the market continuing to dive, down by around 2.7% just before noon.

The fall wasn’t much of a surprise after Wall Street markets dived 2.5% overnight. That was partly because unemployment numbers were much worse than analysts had expected (make no mistake, things are very, very ugly in the US and will be for some time) but mainly because of growing fears about the state of the European economy.

The three big problems are Greece, Portugal and Spain, none of which are big trading partners with Australia, but all of which could have a big indirect impact on our economy.

Greece’s economy is in real trouble, with the company’s budget deficit currently standing at around 12.17% of GDP. The strong countries of the European Union, primarily Germany, are putting pressure on the country to make massive cuts to Government spending to get the deficits back to 2.8% of GDP by 2012.

Greece has agreed, but not surprisingly citizens aren’t too impressed, with a big general strike scheduled for a few weeks time. That is worrying bankers, who are nervous about the Greek Government’s preparedness to go through with the cuts.

Last night, the trouble spread to Portugal, which was set to fell €500 million of Government bonds, but only managed to flog €300 million – no-one, it seems, wants much to do with European bonds right now.

And the Spanish compounded everything by announcing its budget deficits will be higher than expected from 2010 through to 2012.

The three bits of news have bankers thinking the worst: if lenders become nervous about buying government bonds, could this lead to one of these countries defaulting on their loans? That would send shockwaves through the global banking market, perhaps even sparking a second credit crunch.

Exactly how likely that scenario is not clear at this stage, but the concerns sent the Euro down to an eight-month low against the US dollar.

This in turn rattled Wall Street. A higher US dollar could stunt US exports, taking the wind out of the (very) fledgling recovery there. A slower economy means lower corporate profits, which is why US stocks have fallen.

The Australian market has copped two big concerns this morning.

The first is a financial one – problems in the European banking sector would quickly be felt in Australia and would push borrowing costs higher for our banks and, as a result, our SMEs.

The second concern is about the global economic recovery. If it stumbles, then commodity prices will fall, which has a big impact on our market given it is so full of resources companies. Falling demand for commodities will hurt profits in this county, which would in turn hit Government revenues which would in turn put pressure on the Commonwealth Budget.

Yes, it’s amazing that problems in far-off places like Spain and Greece and Portugal could impact Australian companies, but the interconnectedness of global markets means nerves in Athens hit Australia faster than ever before.

Today’s fall might well be overdone – markets do tend to get overly nervous – but it’s a great reminder that things do remain quite fragile around the world.

Australia has shown remarkable resilience to these global chills, but we’re not immune.