Billions of dollars vanished from the value of stocks around the world yesterday as Greek default worries, growing price rises in emerging markets and a surprise rise in US inflation sparked a sharp sell-off.
Officials at the IMF expressed deep concern about Wednesday's rapid turn of events in Athens, where George Papandreou, the Greek prime minister, reshuffled his cabinet and called for a confidence vote in his government.
"I am concerned the situation has changed very dramatically in the past 24 hours," said Zhu Min, a special adviser to the IMF. "We have a team in Athens ready to conclude a review and move things forward but now, given the situation, there is a lot of uncertainty, so we are very cautiously, very closely monitoring the process."
Markets plunged around the world. The Nikkei 225 settled 1.7 per cent lower at 9,411.28 and the Hang Seng Index fell 1.75 per cent to 21,953.11. The FTSE 100 Index of UK stocks fell 1.28 per cent to 5,668.77. The Dow Jones Industrial Average in the US opened slightly higher but remained unsettled after a day of turmoil on Wednesday.
Nymex crude oil futures fell $4.60 to $94.80 per contract.
The list of bad news for the world economy is starting to put the recovery in doubt, said Philippe Dauba-Pantanacce, a senior economist at Standard Chartered.
"With a combination of indicators pointing toward headwinds to the world recovery story - threat of asset bubbles in China, jobless recovery in the US, euro sovereign debt woes - there has been a renewed rise of risk-aversion sentiment among international investors," he said.
The most likely scenario for Greece was that the IMF and the EU would press ahead with their original plan to implement austerity measures, Mr Dauba-Pantanacce added.
But he said that was not absolutely certain. "There is still definitely a chance that the Europeans could lose patience, the IMF could decide not to release its tranche of the next bailout in early July, which would lead Greece to default, wreaking havoc not only in the Greek banking system but also possibly in the European interbank market.
"There is also a strong probability, in the worst-case scenario, that the Europeans could disburse the €12 billion (Dh62.12bn) due early July [without waiting for the IMF], as there is increasing awareness among European politicians of the disastrous consequences of a Greek default," he said.
International banks held US$54.1bn (Dh198.7bn) of Greek government debt at the end of last year, $52.2bn of which was held by European banks, according to the Bank for International Settlements.
The bad news was not limited to Europe. Core US consumer inflation, which excludes volatile food and energy prices, rose 0.3 per cent from April to last month, its fastest increase since July 2008, also catching markets by surprise.
Wholesale inflation increases have also accelerated in India, reaching 9.1 per cent last month, leading the Reserve Bank of India to tighten its two benchmark lending rates by 25 basis points yesterday.
"Domestically, inflation persists at uncomfortable levels. Moreover, the headline numbers understate the pressures because fuel prices have yet to reflect global crude oil prices," the country's central bank said.
Economists at Goldman Sachs also sounded a note of alarm on inflation in emerging markets.
"Inflation and the prognosis for policy tightening over the next six to 12 months is still the big issue for emerging market assets," the investment bank said in a research note. "This is in contrast to much of the rest of the world, and notably for advanced economies such as the US, where the key issue for markets is the abrupt slowing in the cyclical data, as well as whether and to what extent it is likely to reverse."
With inflation taking hold, further interest rate increases in large economies including those of India, China and Brazil seemed likely, the note added.