The New Zealand sharemarket fell 1.8 per cent yesterday as markets in the region were rocked by speculation that Germany is preparing for a default by Greece.
The NZX-50 closed down 60.12 points at 3263.81. Australia fared worse, with the ASX 200 falling 3.72 per cent.
The New Zealand dollar fell to US81.55c at 5pm from US82.08c at 8am
While the sharemarket took a hit, Hamilton Hindin Greene analyst James Smalley said the NZX's isolation meant it came off better than its larger counterparts overseas.
"It's the trend we've seen over the last few months, [the NZX] follows the direction of others but usually not the magnitude of the falls. That's because we don't have the liquidity of big markets and the guys who really move markets with big volumes can't really get in and out of our markets easily."
The sharemarket losses came as German officials debate how to shore up the nation's banks should Greece fail to meet budget-cutting terms of its aid package.
German Economy Minister Philipp Roesler said Europe could no longer rule out an "orderly default" for Greece. An orderly default process would mean "re-establishing the affected state's ability to function, perhaps with a temporary restriction of its sovereign rights".
Roesler called Greece's deficit-reduction measures insufficient to address the crisis, which he said undermined confidence in the common euro currency.
Der Spiegel magazine said Finance Ministry officials were contemplating two scenarios should Greece become bankrupt: one where it stays in the eurozone, and another where it reintroduces its former currency, the drachma.
"Sentiment is actually very, very poor right now," said Kelvin Tay, Singapore-based chief investment strategist at UBS Wealth Management.
"We're looking at a possible default for Greece. There is no way the situation can go on without any form of default."
BNP Paribas, Societe Generale and Credit Agricole, France's largest banks, might have their ratings cut by Moody's Investors Service this week because of Greek holdings, two people with inside knowledge said.
"Things are probably going to get worse before they get better," Erwin Sanft, deputy head of Asian equities research at BNP Paribas, said in Hong Kong. "Much larger economies are being drawn into this crisis. We haven't seen markets correct as much as they should."
The S&P 500 wiped out its weekly advance on Saturday after the European Central Bank said Juergen Stark resigned from the executive board for personal reasons, suggesting policymakers are divided over how to fight the debt crisis.
Hours after his resignation was announced, Stark called for drastic reforms to the eurozone.
The European Commission has announced it will send a team of experts to Greece in the next few days to conclude work on a new rescue package by the end of the month.
- Staff reporter, agencies