A day after an EU-IMF one-trillion-dollar support scheme sparked market euphoria, shares in Asia and Europe fell and the euro came down from highs amid worries that Greece and other debt-burdened countries will not carry out tough austerity measures.
The Greek government asked the European Union and International Monetary Fund for a first tranche of 20 billion euros (26 billion dollars) from a 110-billion-euro bailout package to help it make debt payments this month, a finance ministry source said.
On Monday, Athens ordered a radical overhaul of the country’s costly pension system that it has warned faces collapse. But unions vowed to oppose the plan, which would see an average pension cut of seven percent by 2030.
After major rises on Monday in reaction to another initiative, a 750-billion-euro (one trillion-dollar) EU-IMF fund set up to help debt stricken European nations, stock markets slumped at the start of trading on Tuesday.
The London, Frankfurt and Paris markets were all down more than 1.5 percent. In Asia, Tokyo, Sydney and Hong Kong all closed down by more than 1.1 percent.
The euro, which briefly jumped above 1.30 dollars on Monday, fell back to 1.2749 dollars in European trade on Tuesday. The interest rate paid on Greek 10-year debt rose to 7.8 percent from 6.7 percent on Monday.
Major governments expressed optimism that the 750 billion euros set aside by the European Union and IMF had ended the risk of a new debt crisis enveloping the global economy.
But the IMF warned that European levels of government debt have hit danger levels and vigorous action will be needed to get them down.
Radical short term action had to be avoided as it risked “a relapse into recession,” said the IMF in a report on Europe.
“However, sustainability indicators are flashing warning signs over public debt levels in most countries and sizeable (fiscal) consolidation efforts are needed in the medium-term,” it said.
“For countries with already low fiscal credibility, more immediate consolidation is a must,” it said, warning that the recovery in Europe is particularly weak when compared with other regions and that traditional growth sectors may not be as strong as previously.
Market and analyst doubts have grown as everyone waits for Greece to take promised action to cut its 13.6 percent public deficit and for Portugal and Spain to announce their measures to slash spending.
“As the dust settles from (Monday’s) ‘shock and awe’ bailout package from the eurozone, the realisation that this is a sticking plaster to a much deeper rooted problem has slowly permeated through and the euro has given up most of (Monday’s) gains,” said CMC Markets analyst Michael Hewson in London.
He added that an announcement by Moody’s ratings agency that it may cut Greece and Portugalâs ratings shortly also “weighed heavily on the euro.”
Christopher Wasserman, founder of the Zermatt business summit in Switzerland, expressed scepticism over the impact of the EU-IMF aid plan.
“Whilst the loan may avert the crisis from spreading across the EU in the short term, the reality of the situation born out by the recent credit crisis is that trust in policy makers is at an all time low and unless business and political leaders adopt a more stable approach to risk, throwing money at the current crisis is simply a waste of time,” Wasserman said.
Meanwhile Japan announced that it will limit the amount of debt it issues in the next fiscal year given the heightened market sensitivity. “Everybody is growing sensitive to sovereign risk” after Greece’s debt crisis rocked global markets, Finance Minister Naoto Kan told reporters.
After decades of heavy stimulus spending and declining tax revenues, Japan has a public debt mountain bigger than any other industrialised nation, expected to hit 200 percent of gross domestic product in the next year.
With around 95 percent of Japanese government bonds bought by domestic investors, officials reject comparisons with Greece but scrutiny of the debt pile is increasing.
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