Traders nervous before Slovakia bailout fund vote

AP News
Posted: Oct 11, 2011 6:52 AM
Traders nervous before Slovakia bailout fund vote

Concerns that Slovakia might not approve a stronger European bailout fund _ seen as necessary to beating a path out of the continent's current debt crisis _ weighed on markets Tuesday.

Stock markets have seesawed in recent weeks between hope and despair that European leaders will present a solution to the debt crisis, which has threatened to bankrupt Greece and several major banks that hold its debt.

After announcements that France and Germany were inking a grand plan to save the banks and that Belgium would partially nationalize embattled Dexia, markets rallied on Monday.

But with few details, it was back to reality on Tuesday, with all eyes on Slovakia, where the ruling party is struggling to persuade its coalition partners to vote for an expanded bailout fund.

In order to strengthen the fund _ which analysts say is the very least Europe needs to do to prevent the crisis from spreading to bigger economies like Spain and Italy _ all 17 countries that use the euro must approve the plan. Sixteen have and are waiting on Slovakia.

"The weekend talks between Merkel and Sarkozy have really given us little more than we had already," said James Hughes, a senior analyst with Alpari. "The time will come soon for talking to stop and action to take over. ... Soon the good news for the markets will have to be an actual plan of how to clean up this mess."

The day could also bring news from Greece, which could run out of money this month if it doesn't get the next installment of its bailout loans. Athens' creditors may announce Tuesday if the government's cuts have gone far enough to warrant the next tranche.

A Greek default would cause the value of its bonds held by European banks to plunge, hurting their balance sheets. U.S. banks would also be affected if Greece goes through a messy default, since they own Greek bonds and also have close ties to European banks.

Despite those concerns, the euro has held its own over the past week or two. But the bad news seemed to be finally catching up with it Tuesday. It was trading down 0.3 percent at $1.3584.

As investors waited for news, France's CAC-40 fell 0.8 percent to 3,136; the DAX in Germany was down the same amount to 5,804. The FTSE index of leading British share slid 0.8 percent to 5,357.

U.S. markets were also nervous. Dow futures fell 0.5 percent to 11,313, while S&P futures were dropped 0.6 percent to 1,183.

Oil was also hit since a worsening European debt crisis could have effects on the broader economy; as the economy slows, demand for oil drops, too.

Benchmark oil slipped 85 cents to $84.57.

Those were sharp reversals from a day earlier, but Asian markets were still riding Monday's optimism.

Japan's Nikkei rose 2 percent to close at 8,773.68. Hong Kong's Hang Seng shot up 2.4 percent to 18,141.59. South Korea's Kospi rose 1.6 percent to 1,795.02, and Australia's S&P/ASX 200 added 0.6 percent to 4,227.60.

China's Shanghai Composite Index rose 0.2 percent to 2,348.52, a day after a government investment fund announced it had bought shares in major banks, helping to bolster the country's sagging stock market.


Associated Press Business Writer Pamela Sampson contributed to this report from Bangkok.