With regional economic growth expected to become a casualty of the European debt crisis, risk aversion hit international share markets on Monday and slashed $43 billion from the S&P/ASX 200 Index.

The $1.1 trillion (€750 billion) bailout fund announced previously is intended to guarantee the debt of mainly southern European nations, specifically Portugal, Ireland, Italy, Greece, and Spain (PIIGS in econospeak). Its announcement generated a surge of investor confidence. But as understanding grew that the accompanying severe budget cuts will curtail economic growth and government revenue in the region, possibly exacerbating the debt crisis, that optimism proved short lived

Now investors are withdrawing their capital from assets that are considered risky, including the shares market. The resulting sell-off slashed 3.1% from the ASX 200, sending the index to 4467.2, a level not seen in eight months. As European markets opened, the sell-off continued there.

“It’s a confidence story, alongside worries that we might re-enter a banking crisis,” said Matt Williams, portfolio manager with Perpetual.

Once the initial euphoria over the European bailout had passed, said Mr. Williams, investors questioned if the scheme would successfully stabilise the European Union and the Euro, which has tumbled in value as investors drain their capital from the region.

Colin Whitehead, an analyst with Fat Prophets, said Australia is not immune to the potential problems, if investor confidence doesn’t recover or if the Asian recovery is damaged by the contraction of such a large trading partner as the Eurozone.

“We don’t have direct exposure,” said Mr. Whitehead. “But as we saw in 2008, that’s not necessarily a factor that holds markets up if there’s a widespread aversion to risk.

“The bailout just provides breathing space. It does not actually fix the problem.”

However, many economists don’t share Mr. Whitehead’s concerns, believing Australia’s Asian trading partners will not suffer fallout from the European crisis, and that Australia’s recovery is secure.

International bank HSBC researched the possibility of the European financial crisis affecting Asia. The report found that while Europe is the largest external destination for Asian exports, the researchers believe demand from other regions would outweigh any shrinkage of that market.

Source: http://www.businessday.com.au/business/43b-lost-in-europe-20100517-v9fq.html