Chinese stocks sink as Irish debt crisis boils

[November 16, 2010]  LONDON (AP) -- China's stock market suffered another big drop Tuesday and prompted an early retreat in European shares, as investors waited to see if Ireland will end up asking its 15 partners in the eurozone for a financial rescue package.

In Europe, the FTSE 100 index of leading British shares was down 64.73 points, or 1.1 percent, at 5,755.68 while Germany's DAX fell 34.59 points, or 0.5 percent, at 6,755.58. The CAC-40 in France was 41.62 points, or 1.1 percent, lower at 3,822.62.

Wall Street was poised for a sizable drop at the open -- Dow futures were down 65 points at 11,108 while the broader Standard & Poor's 500 futures fell 6.7 points to 1,189.10.

Investors on Tuesday were particularly worried about the growing realization that confidence in China is slipping, as evidenced by the 4 percent drop in the country's benchmark Shanghai Composite Index to 2,894.54.

The index is down 8 percent in just three trading sessions amid fears that Chinese monetary authorities will be raising interest rates to cool a property boom and dampen inflationary pressures. Rumors that price controls may be introduced too have added to investors' concerns.

"This hit confidence across much of Asia, so it's perhaps no real surprise that the sell-off is continuing," said Anthony Grech, head of research at IG Index.

The main focus in the markets for the rest of the day is whether Ireland does an about-turn and requests a financial aid package later at a meeting of eurozone finance ministers in Brussels.

Although the Irish government has been saying it doesn't need any money as it's fully funded until the middle of next year, there's mounting pressure on Dublin to agree to a rescue deal amid worrying signs that Europe's debt crisis will create a domino effect -- Portugal is widely considered to be next in the line of fire.

The Irish government has been trying to convince investors that its debt crisis is not the same as Greece's, since the Irish woes are rooted in the near-collapse of its banking system as opposed to a systemic budgetary failure like that in Greece.

As a result, many in the markets thinks that Ireland is trying to negotiate as good a deal as possible in return for what is rumored to be an euro80 billion ($110 billion) financial package.

"Although Ireland is weak and in obvious need to external finance, at some point anyway, the current situation is somewhat unique in that Ireland does have some bargaining power," said Derek Halpenny, European head of global currency research at the Bank of Tokyo Mitsubishi UFJ.

"Given that it doesn't require finance now, in theory Ireland could allow for the turmoil to spread as confidence in bank debt tumbles as concerns grow over the state of liquidity not just in Irish banks but in financial institutions across the eurozone," Halpenny added.

That's the last thing that Europe's finance ministers will want as they meet over the next two days -- the eurozone ministers meet this evening followed Wednesday by all 27 of the EU's finance chiefs.

Analysts remain skeptical that an Irish deal will put an end to the crisis that has engulfed the eurozone over the last year. If recent history is any guide, it's more than likely that another country could be targeted.

"A more probable outcome is that the market would move on to look for the next vulnerability, much as they have done after Greece," said Daragh Maher, an analyst at Credit Agricole.

The big worry is that one of Europe's biggest economies, Spain, will end up being dragged into the mire and the consequences of that for Europe are potentially dramatic.

Ahead of the meeting, some stability has emerged in both the bond and currency markets, with the euro recovering its poise somewhat after a pretty dire run in the last week or so -- by mid-morning London time, the euro was up 0.2 percent at $1.3608.

As recently as November 4, the euro had been trading at a multi-month dollar high of $1.4281.

Better-than-expected German economic news helped solidify the euro. The ZEW institute said its main gauge of investor sentiment rose in November to 1.8 from minus 7.2 the previous month, meaning that investors think that conditions will improve over the coming six months than deteriorate. The rise was ahead of the market consensus of a more modest improvement to minus 4.

Earlier in Asia, South Korea's Kospi closed down 0.8 percent at 1,899.13 after the Bank of Korea raised its key interest rate for the second time in four months after inflation burst above 4 percent in October. It also adopted a more aggressive stance, removing the wording "under the accommodative policy stance" from its statement, suggesting that interest rates will continue to rise to more normal after two years of super-low borrowing costs.

Japan's Nikkei 225 stock average lost 0.3 percent to 9,797.10. Hong Kong's Hang Seng slid 1.4 percent to 23,693.02 while Australia's S&P/ASX 200 gained 0.3 percent to 4,700.30.

Benchmark crude for December delivery was down 69 cents at $84.17 a barrel in electronic trading on the New York Mercantile Exchange.

[Associated Press; By PAN PYLAS]

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