Global Markets Rattled by Greek Crisis, China Credit Tightening

by


Global investors panicked Tuesday after Greek stocks fell over 10% and China signaled a tightening of its credit market amidst fears of growing defaults and oversized risk in local bonds.

While Brazil, Greece, and China saw a bearish market on greater concerns about emerging market growth, U.S. stocks reversed from an early morning decline as greater confidence in American stability overtook concerns about a global slowdown.

Oil was mostly flat in trading, with WTI up 0.16% on Tuesday afternoon and Brent oil down 0.14%. Both futures have stayed above $62 and $65 support, but erased early morning gains on Tuesday with futures volumes remaining 1.7% above the 100-day moving average. U.S. oil stocks say a widespread selloff on Monday, but saw a slight recovery on Tuesday as traders bet on a bottom to energy prices.

China Credit Fears

Falling energy prices have brought enthusiasm to the Chinese market, where the net energy consumer and manufactured goods exporter could see rising margins from cheaper input costs. The Shanghai stock exchange index saw 24% gains over a month before losing 5.4% on Tuesday after the Chinese government announced a tightening credit policy to lower future default rates.

The decision impacts $75.8 billion, or 470 billion yuan, of outstanding debt that will no longer be eligible for repurchase agreements.

The China Securities Depository and Clearing Corporation said local government debt rated below AAA or debts by entities with ratings below AA can no longer be used as collateral for short-term loans received from repurchase agreements. This means higher risk debt from local governments and corporations will no longer be viewed as liquid collateral, which will limit many companies and municipalities’ access to credit in the near term.

The changing policy rattled traders, causing a widespread selloff as the market re-priced liquidity risks from Chinese firms. While bankruptcies have not spiked in the country, many smaller Chinese firms had not priced in the risks of a cash flow disruption. With the clearinghouse decision, more companies could see face a lack of liquidity that could result in defaults.

Greece Stock Crash

In Europe, equities slid while the Greek market saw its biggest loss in over 25 years. The fall came shortly after many economists had confidently proclaimed Greece’s crisis a thing of the past, after Greece posted three quarters of consecutive economic growth. 

While economic indicators remain relatively positive, a political mix-up has startled investors. Prime Minister Antonis Samaras has brought forward the date for a presidential poll, which may benefit the opposition Syriza party. Syriza is a combination of euro-communist and radical left-wing politicians who have seen a surge in popularity after five years of EU-enforced austerity.

Amongst its positions, the Syriza party has said in the past that it would support a debt default and removal from the euro, but more recently Syriza leader Alexis Tsipras has said the party would not allow Greece to default and it would not leave the euro. However, investors remain concerned that a Syriza party in power could stimulate bank runs and present a greater challenge to EU solidarity, which in turn could destabilize the region as it attempts to avoid deflation.