Greece contagion sweeps euro zone bond markets, hits shares

[LONDON] Global financial markets suffered their first bout of significant contagion from the Greek crisis this year on Monday after 11th-hour talks between the near bankrupt country and its creditors collapsed.

After weeks of minor ebbs and flows on the stop-start negotiations, bond markets across the euro zone signalled alarm that a deal may not be reached by mid-year, when Athens must repay 1.6 billion euros (S$2.4 billion) to the International Monetary Fund.

The premium investors demand to hold Spanish, Italian and Portuguese government bonds over low-risk German Bunds hit 2015 highs, with the 10-year yield gap between Spanish and German debt at its widest since August.

Shares in Europe and Asia fell, led lower by banks.

The euro weakened against the dollar, pressured also by investor anxiety ahead of a US Federal Reserve interest rate-setting meeting later this week.

US stock index futures were down 0.4 per cent, suggesting Wall Street would extend Friday's declines, which were blamed on worries over Greece and the Fed meeting.

Talks on Sunday between Greece and its creditors, described as a "last attempt" to bridge their differences, broke up after less than an hour.

European Union officials said Athens had offered no new concessions to secure the funding it needs. Athens said it would not give in to demands for more pension and wage cuts.

Greece has already been bailed out twice and many banks have cut their exposure to the country while euro zone authorities have put in place mechanisms to limit contagion. However, the prospect of default and the possibility of Athens leaving the euro weighed heavily on sentiment on Monday. "It's clear that each day that passes we come closer to a potential Greek default and this risk aversion is a natural reaction by the market," said KBC strategist Mathias van der Jeugt.

The pan-European FTSEurofirst 300 stock index fell 1 per cent and a gauge of European stock market volatility hit its highest since January 22, days before the left-wing Syriza party of Greek Prime Minister Alexis Tsipras won power in a parliamentary election.

Banks in Spain, Italy and Portugal were among the big losers, with Italy's Banco Monte dei Paschi down 4.1 per cent and Spain's Banco Popular and Portuguese Millennium bcp both down 3.8 per cent.

Athens stocks fell 4.4 per cent while the exporter-heavy German DAX index lost 1.5 per cent. "Sentiment remains negative with rallies likely to be sold until there is some positive news (on Greece)," said Peregrine & Black senior sales trader Markus Huber.

MSCI's broadest index of Asia-Pacific shares outside Japan dropped 0.9 per cent. Tokyo's Nikkei 225 index fell 0.1 per cent, with traders citing concern over Greece and the Fed meeting, which ends on Wednesday.

Solid US data last week reinforced expectations that the Fed is on track to raise rates, possibly as soon as September. Investors will focus on any changes in Fed Chair Janet Yellen's language in a post-meeting news conference.

The euro was down 0.3 per cent at US$1.1222, recovering from a low of US$1.1188. Euro/dollar one-month volatility, a gauge of how sharp swings in the exchange rate are expected to be, hit its highest for 3-1/2 years.

Euro weakness helped push the dollar 0.3 per cent higher against a basket of major currencies.

The yen was down 0.2 per cent at 123.60 per dollar.

Safe-haven German 10-year bond yields fell 2.3 basis points to 0.82 per cent while yields on both Italian and Spanish 10-year bonds rose more than 11 basis points. Greek 10-year yields rose 92 basis points to 12.75 per cent, still a percentage point below late-April peaks.

Oil and gold fell as the dollar firmed. Brent crude lost US$1 a barrel to US$62.84. Gold fell half a per cent to US$1,175.26 an ounce.

REUTERS