Greece contagion sweeps euro zone bond markets, hits shares

Global financial markets suffered their first bout of significant contagion from the Greek crisis this year on Monday after 11th hour talks between the near bankrupt country and its creditors collapsed.

After weeks of minor ebbs and flows on the stop-start negotiations, bond markets across the euro zone signalled alarm that a deal may not be reached by mid-year, when Athens must repay 1.6 billion euros ($1.8 billion) to the International Monetary Fund.

The premium investors demand to hold Spanish, Italian and Portuguese government bonds over low-risk German Bunds hit 2015 highs, with the 10-year yield gap between Spanish and German debt touching its widest since August.

Shares in Europe and Asia fell, led lower by banks.

The euro weakened against the dollar, pressured also by investor anxiety ahead of a US Federal Reserve interest rate-setting meeting later this week.

US stock index futures were down 0.5 per cent, suggesting Wall Street would extend Friday's declines, which were blamed on worries over Greece and the Fed meeting.

Talks on Sunday between Greece and its creditors, described as a last attempt to bridge their differences, broke up after less than an hour.

European Union officials said Athens had offered no new concessions to secure the funding it needs. Athens said it would not give in to demands for more pension and wage cuts.

Greece has already been bailed out twice and many banks have cut their exposure to the country while euro zone authorities have put in place mechanisms to limit contagion. However, the prospect of default and the possibility of Athens leaving the euro weighed heavily on sentiment on Monday.

"If Greece leaves the euro zone, euro zone participation will no longer be irreversible. Euro zone participation may even become an issue in elections in other euro countries where eurosceptic parties are gaining ground, such as in Spain later this year," said Ruth van de Belt, investment strategist at Kempen Capital Management.

EURO DOWN

The pan-European FTSEurofirst 300 stock index fell 1.3 per cent and a gauge of European stock market volatility hit its highest since January 22, days before the left-wing Syriza party of Greek Prime Minister Alexis Tsipras won power in a parliamentary election.

Banks in Spain, Italy and Portugal were among the big losers, with Italy's Banco Monte dei Paschi down 4.5 percent and Spain's Banco Popular down 4.1 per cent and Portuguese Millennium bcp down 5 per cent.

Athens stocks dropped 5.2 per cent while the exporter-heavy German DAX index lost 1.7 per cent.

"Sentiment remains negative with rallies likely to be sold until there is some positive news (on Greece)," said Peregrine & Black senior sales trader Markus Huber.

MSCI's broadest index of Asia-Pacific shares outside Japan dropped 0.9 per cent. Tokyo's Nikkei 225 index fell 0.1 per cent, with traders citing concern over Greece and the Fed meeting, which ends on Wednesday.

Solid US data last week reinforced expectations that the Fed is on track to raise rates, possibly as soon as September. Investors will focus on any changes in Fed Chair Janet Yellen's language in a post-meeting news conference.

The euro was down 0.5 per cent at $1.1208, recovering from a low of $1.1188. Euro/dollar one-month volatility, a gauge of how sharp swings in the exchange rate are expected to be, hit its highest for 3-1/2 years.

The single currency also hit its lowest in nearly two weeks against the Swiss franc, before recovering.

Euro weakness helped push the dollar 0.4 per cent higher against a basket of major currencies.

The yen was down 0.2 per cent at 123.60 per dollar.

Safe-haven German 10-year bond yields fell 2 basis points to 0.83 percent while yields on Italian and Spanish 10-year bonds rose 14 and 15 bps respectively. Greek 10-year yields rose 94 bps to 12.76 per cent, still a percentage point below late-April peaks.

Oil fell as the dollar firmed. Brent crude lost $1.3 a barrel to $62.57. Gold was steady at $1,180.60 an ounce.

(Additonal reporting by Jamie McGeever, Emelia Sithole-Matarise and Sudip Kar-Gupta in London, Lisa Twaronite in Tokyo)

(Reuters)