European ministers told their counterparts at a Group of Seven meeting on Saturday they would make sure Greece sticks to its budget-cutting plan. But analysts said Europe needs to go beyond words to restore confidence among investors worried that problems in Greece, Portugal and other weaker euro zone states could upset or derail the global economic recovery.
“What I think is needed is an agreement on behalf of the EU to provide further support for Greece to further ensure that it doesn’t default,” said Michael Woolfolk, senior currency analyst at Bank of New York Mellon. The euro fell 0.3 percent from late US Friday levels to $1.3636, edging back towards an eight and a half month low hit on Friday. The single currency has shed around 10 percent from a 15-month high of $1.5145 in late November. Growing euro zone problems also soured the appetite for currencies like the New Zealand dollar and the Australian dollar, which are dependant on global economic growth.
The kiwi fell to a low of $0.6857, just off $0.6807 struck in Friday’s offshore trade, its lowest since Sept. 4. Japan’s Nikkei average fell below the 10,000 mark, hovering just above the crucial 200-day moving average, as exporters like Sony Corp were clobbered by a strong yen, which has climbed to multi-month peaks against currencies like the Australian dollar and the sterling. The yen, traditionally seen as a safe haven in times of market turmoil, has gained 4 percent against the dollar so far this year as investors fretted about the sustainability of the global economic recovery and moved out of riskier assets. Asia Pacific shares outside Japan as measured by MSCI hovered around their lowest levels since mid-September.
“Sovereign risks in Europe are coming to the fore, and stocks and commodities are falling almost in unison,” said Kenichi Hirano, operating officer at Tachibana Securities. “That shows there are many funds who have been encouraged by the current liquidity but now they’re pulling out due to mounting risks regarding liquidity.” Last week, the cost of insuring debt from the three eurozone countries jumped as Greece’s debt woes was put on the agenda of the meeting of G7 rich nations’ finance ministers and central bankers in Canada’s remote north. European Central Bank President Jean-Claude Trichet issued a statement to express confidence in the Greek deficit-cutting plan, while US Treasury Secretary Timothy Geithner said the Europeans “made clear to us they will manage this with great care.”
The idea of a Greek bailout by the International Monetary Fund was quashed at the G7 meeting by Jean-Claude Juncker, chairman of the euro zone finance ministers’ group. Some investors saw that as a sign that Europe might be preparing financial support for Greece although European leaders would have to settle differences about setting a precedent for bailing out members of the euro zone. “The problem is that there is not a single Treasury that will coordinate that,” said Axel Merk, president of Merk Investments.
