Despite a late US Dow index rally, last night was among the more serious sharemarket falls we have experienced since the global financial crisis plunged markets in 2009. (The Australian share market opened sharply lower and was down 1.57% as Crikey went to press.)

We are well above the dismally low levels witnessed on equities markets during the crisis, but last night you could see fear in almost every corner of the world. The forces behind each of the fears are probably manageable, but when they occur together, as what happened last night, they triggered waves of selling, including a savaging of the Australian dollar.

And of course Gillard’s mining tax dithering is rekindling global doubts about the sovereign risk of this country which threatens to put Australia and our high house prices in the eye of the storm.

And for most Australians, the global wave of selling will be reflected in our share prices levels at June 30, which means the value of superannuation funds will be hit on balance day. Many retirees will have their income reduced for the year ahead.

Let’s look at some of the fears that are plaguing the markets. This sell-off started yesterday in China, and initially the analysts claimed that it was merely the institutions raising money for the $US20 billion Agricultural Bank of China initial public offering. It may have been partly that, but the fall in China’s sharemarkets also reflected the fact that China’s Conference Board corrected its growth index for China from a rise of 1.7% to just 0.3%.

China is slowing much more rapidly than expected, and as a result the bad property loans that are in its banking portfolios will weigh down future growth.

In the past China has always managed these issues and I think it will do it again, but the markets fear there will be much more pain than had been anticipated.

Meanwhile, in Europe the big banks have been playing a stupid game of borrowing from depositors and then investing in the sovereign debts of European countries that can’t pay.

Tomorrow the banks are supposed to repay €442 billion in emergency loans but they almost certainly will have to be bailed out again. Fears of bank collapses are rife. On top of this dire outlook, Europe’s austerity measures will bring on recessions in countries ranging from Greece to the UK which will make it even harder for the banks. And the strikes in Greece will be repeated in many countries, which could make the spending cuts impossible to deliver.

In the US they are helped because in a crisis money flows to the world currency, so the US dollar rises. Nevertheless, there are still chronic housing problems so consumer confidence is depressed and the US economy is still living on the old stimulus packages. Accordingly Wall Street’s earnings estimates look too optimistic.

And finally the falls in the markets are triggering selling from chart-based investors which multiplies the fear and concern.

Allaying all of these fears will require a lot of work on behalf of Europe, China and the US.

And of course when it comes to Australia, we must face the fact that our enormous level of overseas bank borrowing is going to be difficult to sustain at current interest rates. As I keep pointing out, Australian debt, including bank debt, is in a similar range to Italy and not far behind Spain when related to GDP.

If Gillard bungles the mining tax issue in this global environment then the blow to Australia’s sharemarket and the impact on the cost of Australian bank overseas borrowing will be severe. In turn, this will hit house prices.

Peter Fray

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Peter Fray
Editor-in-chief of Crikey