This content is not available in your region

Greek default fear infects markets

Greek default fear infects markets
Text size Aa Aa

Europe’s financial markets fell sharply as the new week started on fears that the Greek government is close to running out of money.

At the same time EU finance ministers failed – during weekend talks – to agree on new steps to resolve the euro zone’s debt crisis.

Investors are now braced for the worst possible outcome a disorderly Greek default on its debts.

French banks Societe Generale and BNP Paribas, which both have exposure to euro zone sovereign peripheral debt, fell 6.0 percent and 5.2 percent to feature in the bottom performers list in Paris

Analyst Oliver Roth of Close Brothers Seydler Bank in Frankfurt said: “It is important for the market to have stability and security. At the moment, that stability is not possible because of the difficult situation in Greece. And that’s why there is so much pressure on investors, after last week’s recovery. But that recovery was only of technical nature.”

Greece’s finances are in such a mess that the previously unthinkable is now being discussed in detail by economists. Howard Wheeldon, of BGC Partners in London said: “We’ve probably already accepted that there will be a default. Greece doesn’t actually have to leave the euro, the euro has to split in two. I think the weaker and the stronger have to go into two separate halves.”

To get its next instalment of bailout money – eight billion euros – Athens has to convince the European Union and the International Monetary Fund that it really will move to cut spending.

Greek Finance Minister Evangelos Venizelos, admitted the whole region is under threat: “This is a very difficult week for the country, for the euro zone, for all of us and for me personally. The problem of Europe as has been proved once more is a political and institutional one.”

The IMF’s representative in Greece said Athens must do what it has promised, including firing thousands more government workers, cutting or freezing state salaries and pensions, raising taxes and actually collecting the billions of tax arrears owed.

“One critical thing we learned is that it (adjustment) will take more time because of the implementation capacity in Greece,” Bob Traa said. “We will stand by you but you need to implement your commitments.” He added: “There is plenty of goodwill to give Greece more time.”

Traa said the debt-choked country had made a strong start on reforms but after municipal elections last autumn the spirit of pushing through reforms waned and this was feeding back into a weaker economy.

On Monday, the head of the World Bank Robert Zoellick urged “cooperative action” on the debt crisis and warned it is starting to hit investor and consumer confidence worldwide.

“So far foreign direct investment to developing countries has held up, which is good, but we need a close watch,” Zoellick told reporters ahead of meetings of global finance leaders in Washington this week. “A new and larger risk looms. The drop in markets and confidence could prompt slippage in developing countries’ investment and a pull back by their consumers too.”