Volatility on cards as doubts surface over Europe talks

European leaders will meet on Wednesday to try to avert the growing debt crisis but there are doubts a deal can be done to prevent another round of global market volatility.

Alarm at Italy and Spain's indebtedness triggered a wave of selling in sharemarkets around the world 10 days ago which became a full-scale rout soon after the United States suffered an unprecedented cut to its credit rating.

One of the most volatile weeks on record saw panic selling, quickly replaced by opportunity buying, and then repeated again; some major stockmarkets plunged more than 5 per cent in one session and then rose more than 5 per cent the next.

At the end, in markets where the sparks to selling originated, in Europe and the United States, net losses were mostly relatively small, with the exception of Frankfurt's DAX.

A ban on the short-selling of financial shares in Europe helped to calm markets, while in Asia markets paid more as collateral casualties.

The NZX 50 declined 1.9 per cent at the end of a roller-coaster week.

German Chancellor Angela Merkel will meet French President Nicolas Sarkozy in Paris on Wednesday (NZT) in their latest effort to get a grip on the mounting sovereign debt crisis in the eurozone.

The embattled leaders have promised to put forward "joint recommendations aimed at strengthening political and economic governance in the euro area" by the end of the northern summer.

After a nerve-shredding week in which French banks were hit by rumours of financial distress and official figures revealed that the French economy stagnated in the second quarter of the year, Sarkozy is keen to show he is leading a fightback. But experts are pessimistic that their meeting will yield a solution to markets' fears about the solvency of a growing number of European countries.

"Given the sequence of recent disappointments, we find it hard to be optimistic about policymakers' capacity to draw a line under the crisis in the near future," said Simon Hayes, of Barclays Capital. One option is a radical increase in the size of the eurozone bailout fund, the European financial stability facility, but that could meet stiff opposition in Germany. Another proposal - one advocated by British chancellor George Osborne - is for eurozone-wide bonds, but that would also be politically tricky.

But yesterday Germany's Finance Minister said his country remained against any collectivisation of eurozone government debt and the creation of the common bonds was impossible while countries ran separate economic policy.

"It still stands: there will be no collectivisation of debt and there will be no unlimited support," Finance Minister Wolfgang Schaeuble said.

"The member states that need our solidarity must reduce their deficits and reform their economies - with at times very tough measures."

Italy and Spain have rushed out emergency austerity plans in recent days to placate the European Central Bank, which reluctantly agreed to buy Italian and Spanish bonds a week ago, after a wrenching sell-off had raised fears that they could be unable to service their debts.

But analysts say the latest spending squeeze could prevent the economy from expanding for the next two years.

* The United States Securities and Exchange Commission is reviewing the method Standard & Poor's used to cut the US credit rating and whether the firm properly protected the confidential decision, according to a person with direct knowledge of the matter.

SEC inspectors are examining S&P's policies for conducting such analyses and whether those procedures were followed when the New York firm downgraded the US credit rating on August 5, said the person, who declined to be identified because the inquiry is not public.

S&P's downgrade of the US for the first time triggered an equity rout that wiped about US$6.8 trillion from the value of global stocks from July 26 to August 11. US officials have said the downgrade was based on a flawed analysis which overstated US debt by about US$2 trillion.

The decision was at odds with the other two main ratings companies, Moody's and Fitch, which both said the US continues to deserve the top credit rating.

SEC staff are also looking into whether certain market participants learned of the downgrade before its announcement.

Ed Sweeney, an S&P spokesman, said the firm did not discuss specific interactions that it had with regulators. "S&P takes its confidential information and securities trading policies, and the related securities regulation, very seriously."

STOCKTAKE

How sharemarkets performed last week:

Down

* Dow Jones: 1.5 per cent

* Nasdaq: 0.96 per cent

* Frankfurt's DAX: 3.8 per cent

* Japan's Nikkei: 3.6 per cent

* Hong Kong's Hang Seng: 4.3 per cent

* NZX 50: 1.9 per cent

Up

* Australian All Ords: 1.4 per cent

* London's FTSE: 1.39 per cent


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