Leaders set for urgent talks as Greece, China rock markets

World markets have been sent spinning by Greece’s forceful rejection of Europe’s proposed austerity and financial bailout.

World financial markets have been sent spinning by Greece’s forceful rejection of Europe’s proposed austerity and financial bailout package, with analysts expecting the volatility to last for months and potentially damage global growth.

Markets have also been rattled by turmoil in China’s sharemarket, which left resource companies bearing the brunt of the falls on the Australian sharemarket yesterday. The Australian dollar dropped to a six-year low of US74.5c.

“We are moving into a period of heightened risk aversion, with weaker commodity prices, reduced Japanese demand and ongoing questions about China and the outlook for the Australian economy,” Westpac markets strategist Robert Rennie said, adding that further falls in the Australian currency were likely.

How the 'No' vote unfolded

The benchmark S&P/ASX 200 index fell by 1.2 per cent to 5475 points, putting its losses in the past two months at more than 8 per cent, or about $140 billion, in the value of stocks.

Although the Reserve Bank board, which is meeting today, would be relieved to see the fall in the Australian dollar, it will be concerned by the increasingly ­unstable global outlook.

The bank will keep rates steady at today’s meeting but markets put a 56 per cent chance on a rate cut by October. A cut would be aimed at stimulating the economy.

Commodity markets are also being rattled by concerns about the Chinese economy. Iron ore prices have slumped 11 per cent over the past week, with futures prices in China indicating that further falls are likely.

CommSec chief economist Craig James said the Australian sharemarket was generally taking the Greek situation in its stride but other Asian markets had been harder hit. The Korean stockmarket (down 2 per cent), Hong Kong (down 5 per cent) and the Japanese market (down 2 per cent) had reacted more strongly.

Retail investors tended to stay on the sidelines when confronted with instability, such as that being driven by the Greek debt crisis, and only buy on significant dips. Other investors tended to move away from equities towards gold and bonds, Mr James said.

Greek finance minister Yanis Varoufakis resigned yesterday, citing comments from European officials that his presence would hinder the resumption of negotiations. His likely replacement, the Oxford-educated Euclid Tsakalotos, is expected to be even less sympathetic towards Europe. Market analysts expect the rebuff to Europe will ultimately result in Greece defaulting on its €341bn ($500bn) government debt, leaving the euro and returning to its own currency, the drachma.

Much depends on decisions by European leaders over the next few days. German Chancellor ­Angela Merkel was expected to fly to France last night for talks with French President Francois Hollande. A decision on whether to resume discussions with Greek Prime Minister Alexis Tsipras on a bailout package will be taken in consultation with European Commission president Jean-Claude Junker, European Central Bank president Mario Draghi and IMF managing director Christine Lagarde.

French Finance Minister ­Michel Sapin said it was up to the Greek government to put forward new proposals on a bailout package. “The vote itself solves nothing,” he said.

Mr Tsipras declared that the 61 per cent vote against the European austerity package, which would have resulted in increased VAT taxes and reduced pensions in return for a continued financial bailout, “gives me greater negotiating strength” with Europe.

European officials said the bailout package that was being negotiated before Mr Tsipras called the referendum had now expired and could not be extended.

Any new package will require parliamentary ratification in several EU-member states, including Germany where elections are due next year.

Interest rates on Greek government bonds soared to 16 per cent yesterday as markets braced for a default, with a €4.2bn bond due for repayment to the ECB on July 20.

Mr Tsipras said his immediate priority was to reopen his country’s banks, which were closed last Monday after the referendum was called, with only limited cash withdrawals allowed from ATMs.

Greek banks are understood to have only a few days of cash available, so the support of the ECB would be required to open the banking system.

Mr Rennie, from Westpac, said this would require a political decision by Europe’s leaders who would not leave it to the ECB to make what could effectively be a final decision on Greece’s continued place in the eurozone.

Mr Rennie said that before the referendum, European authorities could believe they were dealing with a “maverick” leadership in Greece. But the government now had a very strong mandate from voters for its tough stance.

No speedy resolution was ­expected, with the volatility in ­financial markets potentially lasting for months, he said. The euro fell sharply against the US dollar following the Greek result, while the strength of the US dollar also pushed commodity prices lower, particularly oil, which dropped 1 per cent.

The efforts by Chinese authorities to stabilise their sharemarket after 30 per cent falls in the space of two weeks brought some results yesterday, although trade remained extremely volatile.

The Shanghai sharemarket opened 8 per cent higher but ended the day only 2 per cent ­higher. Mr Rennie said that ­although authorities had been partially successful in halting the sharemarket slide, they had not reversed the negative sentiment about China’s economic outlook.

“The extreme volatility in ­Chinese equities is potentially a ­reflection of an economy that is becoming much less ­responsive to policy announcement, and that is leaving global investors with a heightened level of concern about the outlook for Australia,” he said.