Fears of Greek contagion sweep global markets
German Chancellor Angela Merkel said on Wednesday that Europe's fate was at stake, while France declared the euro was under speculative attack but that it would fail. And the Greek government vowed not to retreat a single step despite violence in Athens.
Worries that the crisis may spread to other weak euro zone countries sent stocks tumbling worldwide, with traders looking to a meeting of the European Central Bank later in the day for reassurances that a massive bailout for Greece will keep it from defaulting on its debt.
The MSCI world stock index fell 0.7 percent, and has now has given up all of its gains so far in 2010 following a steep selloff this week.
Japan's Nikkei average fell 3.3 percent to its lowest level in nearly two months, while Asian shares outside Japan fell 2 percent.
The euro sank to its lowest level in 14 months, below $1.28. It has fallen 10 percent since the start of the year as Greece's fiscal troubles escalated.
"The focus stays on the euro as the contagion trade persists," said JP Morgan in a morning note. "Today's ECB meeting has grown immensely in importance as the redeployment of some form of credit crisis tools seems increasingly possible."
The ECB holds its monthly meeting later on Thursday, at which it is expected to keep interest rates unchanged at 1 percent. But markets will be closely watching if it moves toward buying Greek government bonds, or those of other countries, to halt the crisis which is threatening the common currency's survival.
GREECE GENERAL STRIKE
Concern that the Greek government will be unable to make all of the deep budget cuts agreed with the EU and IMF over the weekend because of social unrest is one of the drivers of the euro zone turmoil.A general strike on Wednesday shut down Greek airports, tourist sites and public services.
About 50,000 protesters marched against planned public spending cuts and tax rises, demanding tax cheats and corrupt politicians be put on trial.
Hundreds of protesters threw stones and bottles at police who responded with tear gas in easily the biggest demonstration since Prime Minister George Papandreou took office last October.
Three people, including a pregnant woman, choked to death when rioters set an Athens bank ablaze during a protest against wage and pension cuts that were the price of the 110 billion euro ($146.5 billion) EU/IMF bailout agreed on Sunday.
Greek governments have a history of backing away from reforms due to public protests but Finance Minister George Papaconstantinou stressed this time would be different.
"We are prepared to pay the heavy political cost," he told parliament during a debate on the austerity bill. "We will not take a single step backwards."
Merkel said the euro currency was in the most serious crisis of its 11-year life, and other euro zone countries could be hit unless the Greek rescue succeeds.
European Monetary Affairs Commissioner Olli Rehn said the crisis must not spread.
"It's absolutely essential to contain the bushfire in Greece so that it will not become a forest fire and a threat to financial stability for the European Union and its economy as a whole," he told a news conference.
Merkel, whose foot-dragging many analysts have blamed for aggravating the Greek crisis, told parliament the success of a 110 billion euro rescue package would determine "nothing less than the future of Europe -- and with it the future of Germany in Europe".
Without the aid, a chain reaction threatened to destabilize the European and international financial system, she said in a debate on approving Berlin's 22 billion-euro contribution to the emergency loans for Athens, despite German public hostility.
CONTAGION FEARS
Troubles in the eurozone drove U.S. treasury debt prices higher as investors fled to safe havens, including gold and the dollar, worried the crisis could cross the Atlantic and thwart the U.S. recovery -- much like how the U.S. housing crisis battered the rest of the world in 2008.One leading economist drew parallels with the "Asian Contagion" crisis of 1997-98, which eventually ricocheted around the world, leading to debt default in Russia and the collapse of a U.S. hedge fund, Long Term Capital Management.
"In some respects what is going on in southern Europe right now feels a lot like what went on in southeastern Asia in summer 1997," said Stephen Roach, chairman of Morgan Stanley Asia.
The IMF ended up bailing out Thailand, where the crisis began, along with Indonesia and South Korea. "It's difficult to stop the bleeding with a package directed at only one country," Roach said at a bankers' event in Frankfurt.
Gold priced in euro struck a record as investors lost faith in the currency. Spot gold was at $1,175.30 an ounce, up $1.10 from New York's notional close on Wednesday.
Yields on the debt of peripheral European countries continued to rise on Wednesday, while the cost to insure five-year Greek bonds hit an all-time high.
An analyst at Moody's Investors Service said the ratings agency was more likely to downgrade Portugal's credit rating after putting it on a three-month review on Wednesday.
Despite official denials, many economists are convinced Greece will have to restructure its debt, making private investors take a share of the pain.
Papandreou presented an austerity bill to parliament on Tuesday which foresees 30 billion euros in new savings. It is expected to pass, but the conservative opposition vowed to vote against it, dooming hopes of a political consensus.
So far, demonstrations have been limited to tens of thousands but anger is mounting, with opinion polls showing ordinary Greeks believe they are paying the price of the crisis while tax evasion and corruption go unpunished.
(Additional reporting by Harry Papachristou and Lefteris Papadimas in Athens, Jan Strupczewski in Brussels and Carolyn Cohn in London, Edward Taylor in Frankfurt, Crispian Balmer in Paris, Andrei Khalip in Lisbon, Eva Lamppu in Helsinki; Writing by Bill Tarrant; Editing by Kim Coghill)
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