Stocks took another battering Monday after Greece admitted it won’t meet its deficit reduction targets, raising renewed fears that the country will not get crucial bailout loans it needs to avoid a default.
On Sunday, Greece’s finance ministry said the deficit this year will likely be 8.5% of its gross domestic product, higher than the 7.8% previously anticipated, and blamed a deeper-than-expected recession for the failure. The Greek economy is projected to shrink 5.5% this year.
The revelation that Greece is finding it increasingly difficult to reduce its borrowings in spite of all its austerity measures has raised fears that international creditors will effectively pull the plug.
Without the latest €8-billion ($10.8 billion U.S.) loan, Greece has said it won’t be able to pay all its bills starting in mid-October.
Greece has been reliant since May 2010 on regular loans from a €110-billion ($150 billion U.S.) bailout from other eurozone countries and the International Monetary Fund. It was granted a second €109-billion package in July, but the details of that deal are still being worked out.
Under the first bailout, Greece has to achieve certain targets in order to get the cash it needs to pay off its bondholders and pay salaries and benefits. Representatives of the so-called troika -- the European Commission, European Central Bank and IMF -- are in Athens now, trying to assess whether Greece has done enough to get its hands on the next batch of bailout cash.
Finance ministers from the 17 euro countries, including Greece’s Evangelos Venizelos, are meeting later Monday in Luxembourg to assess the latest Greek developments.
Worries over Greece were taking a particular toll on Europe’s banks as investors worry about their potential exposure to Greek debt and about the possibility of a disorderly debt default by the country.
Dexia, which is based in France and Belgium, was one of the worst performing stocks in Europe, trading as much as 14% lower, after ratings agency Moody’s said it was reviewing its rating for a possible downgrade and reports that the finance ministers from France and Belgium were discussing ways of helping the bank out.
With so many worries around, the euro was trading 0.5% lower at $1.3334 U.S.
The losses in Europe followed a big retreat in Asia, with Hong Kong’s Hang Seng leading the way lower with a 4.4% decline to 16,822.15. Japan’s Nikkei fell 1.8% to 8,545.48 even after a government survey showing an improvement in business confidence among Japanese manufacturers. Meanwhile China’s main index in Shanghai declined 0.3% to 2,359.22.
As if Greek jitters weren’t enough, there’s a lot of potential news this week that could affect the market mood. A raft of U.S. economic data kicks off later with the monthly manufacturing survey from the Institute for Supply Management. A collapse in its main indicator in August was one of the triggers behind the turmoil that has gripped financial markets since.
The U.S. data this week culminates with Friday’s nonfarm payrolls report for September. The figures often set the tone in markets for a week or two and another weak number could well reinforce concerns over the world’s largest economy.
Central banks in Europe will also feature, with both the European Central Bank and the Bank of England under pressure to do more to boost growth. A particularly grim eurozone manufacturing survey has added to expectations that the ECB will cut its main interest rate from the current 1.5 percent some time over the next couple of months.
Though inflation in both the euro-zone and Britain are running uncomfortably above target, investors will be looking to see if the ECB reverses course and starts cutting rates, just two months after raising them, and if the Bank of England authorizes another monetary stimulus.
