Markets rally but fears remain

By the market's close yesterday, the ASX 200 had recovered to a fall of 0.3 per cent despite falling precipitously at the opening.

UBS Australasia's chief economist, Scott Haslem, said if debt fears from Greece were not contained in Europe, the world faced the prospect of "Global Financial Crisis No. 2".

But he pointed to market indicators of financial distress that remain well below peak levels that occurred when the investment bank Lehman Brothers collapsed in September 2008.

It was the second worst week of falls for the ASX 200 since market turmoil in November 2008, or a fall of 6.6 per cent for the week.

The ASX 200 closed at 4305.4, or more than 14 per cent below its peak above 5000 on April 15, and its lowest level since August.

The Australian currency also remained flat yesterday, trading about US82.87?, despite hitting a low of US80.73? during the day, well below its April 30 high of US93.04?.

In a reminder of previous market ructions, rumours were reported that the Reserve Bank stepped in to buy the Australian currency as it did in late 2008. Weekend Business believes this was not the case.

The prolonged currency sell-down was attributed by AMP Capital's chief economist, Shane Oliver, to investors seeking safe havens in global uncertainty and the likelihood that the Reserve Banks would postpone further Australian interest rate rises.

Mr Haslem said the most likely outcome of the instability was that European policymakers would address contagion fears posed by Greece and there would be a return to market normality, with little impact on Australia's growth prospects.

Despite sharemarket turmoil and big fluctuations in the Australian currency, interbank lending rates in the United States, Europe and Australia remain below peaks reached at the height of the global financial markets.

The interbank lending rate is less than 0.7 percentage points above a benchmark rate in all three markets.

At the height of the crisis, the rate at which US banks were prepared to lend to each other blew out to more than 3.6 percentage points above a benchmark rate, the drying-up of credit presaging a near collapse in the global banking system.

In another measure of financial stability, the prices of credit default swaps used as an indicator of possible default on government bonds have reached historically high levels for Greece and Spain.

However, the prices for credit default swaps for bonds from Australia, the US and Britain remain below earlier financial crisis peaks.

An index that measures the volatility in financial markets, known as the VIX, spiked to 45 on Thursday, less than the 80 it reached during the Lehman Brothers collapse, but more than double recent lows.

Sharemarket analysts have also played down the impact of the new resources super profit tax as a contributor to widespread market falls.

In a note yesterday Gerard Minack, an analyst with Morgan Stanley, said commodity prices and mining stocks had fallen globally in the past month based on such factors as concerns about European growth and the sustainability of China's growth.

Dollar could hit US75? Page 3