Stocks and euro sink as ECB chief resigns

Europe’s handling of its debt crisis returned to haunt markets today, with stocks down sharply and the euro sinking to its lowest level against the dollar in more than six months after a top European Central Bank official unexpectedly resigned.

Juergen Stark, a key member of the ECB’s rate-setting governing council, quit for personal reasons, the ECB said. Investors, however, noted that Stark has been a consistent critic of the ECB’s programme to purchase government bonds of debt-ridden European nations in the markets.

The programme is designed to prevent the European debt crisis from enveloping Italy and Spain in particular, but it potentially exposes the ECB to the risk of huge losses on shaky bonds.

Stark will stay in the job until a replacement is found.

Disagreement over how to handle the European debt crisis, which has already led to multibillion-euro bailouts for three of the euro’s 17 members, has been cited as one of the main reasons why it continues to flare up.

“The European troubles are permeating across global financial markets,” said Nick Bennenbroek, head of currency strategy at Wells Fargo Bank.

The euro, which was already trading lower after Thursday’s indication from ECB president Jean-Claude Trichet that there will not be any more rate hikes in coming months, fell to its lowest level since the end of February after news of Stark’s resignation.

By late afternoon in Europe, the euro was 1.4% lower at 1.36 dollars (86p), its lowest rate since February.

Stocks also took a hit. In Europe, the FTSE 100 index of leading British shares closed down 2.4% at 5,214.65 while Germany’s DAX fell 4.0% to 5,189.93. The CAC-40 in France was 3.6% lower at 2,974.59.

In the US, the Dow Jones industrial average was down 2.7% at 10,987.48 while the broader Standard & Poor’s 500 index fell 2.6% to 1,154.70.

US stocks had already been trading lower after Federal Reserve chairman Ben Bernanke failed to outline new monetary stimulus ahead of a meeting of finance ministers and central bankers of the Group of Seven top industrialised countries.

Though G-7 nations are indicating they want to pursue measures to lift growth, the markets remain sceptical as to what they can actually do, given the budgetary constraints that are afflicting many countries, particularly in the US and Europe.

“In the US and the eurozone, the escalation in debt and deficits leaves little room for any substantive fiscal stimulus, thus putting the burden on monetary policy,” said Neil MacKinnon, global macro strategist at VTB Capital.

US Treasury Secretary Timothy Geithner backed President Barack Obama’s €444bn jobs package, which was outlined to Congress Thursday, and said Europe’s policymakers have to take more forceful action in dealing with the debt crisis. He also called on China and other emerging countries to bolster demand.

“The world economy is in the midst of the second slowdown of this recovery from the financial crisis of 2008 and 2009,” Geithner wrote today in the Financial Times. “The question is not whether we have the economic or financial capacity to act to strengthen growth, but whether we have the political ability to do the right things.”

Earlier in the day, Asian shares struggled for gains. Japan’s Nikkei 225 index swung between gains and losses before closing down 0.6% at 8,737.66. Sentiment was hardly helped by news that the country’s economy contracted in the April-June quarter at an annual rate of 2.1%, worse than the initial estimate of 1.3 %.

Hong Kong’s Hang Seng was 0.2% lower at 19,866.63, while mainland Chinese shares lost ground after the government reported that prices rose 6.2% from a year earlier. While that represented an easing from a 37-month high of 6.5% in July, it was far above the government’s 4% target for the year.

China’s National Statistics Bureau also said industrial production slowed in August, rising 13.5% from the year before, compared with a 14% increase in July.

The benchmark Shanghai Composite Index edged down less than 0.1% to 2,497.75 after gaining 1% earlier in the day while the Shenzhen Composite Index lost 0.6% to 1,094.03.

The reverse in stocks weighed on oil prices too. Benchmark oil for October delivery was down 2.31 dollars to 86.74 dollars in electronic trading on the New York Mercantile Exchange.