European shares sank to new 2012 lows on Wednesday in a broad-based sell-off as concern over contagion from Greece gripped investors.
The FTSEurofirst 300 index fell 0.7% — having dropped 0.7% on Tuesday as well — after Greek politicians failed to put together a ruling coalition, ramping up concern over what would happen if it leaves the euro zone.
Spain’s IBEX 35 and Italy’s FTSE MIB sank 0.6% and 0.2% respectively.
Debt-stricken Greece is faced with the prospect of a second election in less than two months after failing to form a government, though France and Germany have pledged support and perhaps help for growth.
The election is expected to be held on June 17.
German Chancellor Angela Merkel and France’s new President, Francois Hollande, met on Wednesday to discuss the crisis in the continent. “We want Greece to remain in the euro zone and we know that this is the wish of the majority of the Greek people,” Merkel told a joint news conference.
Financial analysts believe that Europe’s banks could manage a Greek euro zone exit, but any contagion into Italy or Spain would increase the severity of the situation considerably.
“The issue here is uncertainty because we are in uncharted territory (there is no formal blueprint for euro member state to exit currency) — markets hate uncertainty because they can’t price it properly,” said Darren Sinden, senior trader at Silverwind Securities.
Meanwhile, Ireland has expressed fears that the uncertainty across Europe could its plans to exit its international bailout next year.
Irish borrowing costs rose sharply for the second day running on fears that Greece will quit the euro zone. Finance minister Michael Noonan said, “We hope we’ll get back into the markets at the back end of 2013 but we might not because there is such uncertainty in Europe now.”
Greeks are reportedly withdrawing euros from banks on the prospect of rapid devaluation if the country leaves the euro zone.