Euro down, markets fall, as Greek crisis deepens

The sell-off in global markets accelerated overnight amid fears that the eurozone debt crisis is going to worsen and China's recovery is set to stumble. As Asian stocks fell, the euro slump continued, falling below $1.30 for the first time since April 2009.

The losses came on top of a loss of more than $1.1 trillion that was wiped from the value of stocks yesterday on specific concern that Greece's €110bn rescue package will need to be extended to Spain and Portugal - countries that may need far larger guarantees to safeguard against default.

"A renewed wave of pessimism is sweeping markets," says Mike Jones at Bank of New Zealand. "Fresh concerns over contagion from the Greek fiscal crisis are seeing risk aversion soar. This is causing investors to ditch the euro in favor of Œsafe haven¹ currencies such as the yen and the dollar."

Several leading economists say the eurozone crisis is not over. Martin Wolf in the Financial Times says the EU must find a way to allow sovereign defaults, however messy, or create a true fiscal union, with strong discipline and funds sufficient to cushion adjustment in crushed economies.

"The crises now unfolding confirm the wisdom of those who saw the euro as a highly risky venture. These shocks are not that surprising. On the contrary, they could have been expected. The fear that yoking together such diverse countries would increase tension, rather than reduce it, also appears vindicated: look at the surge of anti-European sentiment inside Germany."

But, he continues, "now that the eurozone has been created, it must work."

Others say the developing crisis will ultimately force Europe to make a choice between further integration or disintegration.

"So what is the endgame of the eurozone's multiple crises?" asks the FT's Wolfgang Munchau. "For Greece it will be debt restructuring, a polite term for negotiated default. The broader outcome is more difficult to predict: it will either be deep reform of the system or a break-up."

While these outcomes lie in the future, the immediate concern is to find ways to reassure the markets that Greece's problems will not spread to other nations. This is difficult to achieve. Yesterday, Spanish prime minister José Luis Rodríguez Zapatero was forced to deny market rumours that his country would ask for €280bn from the European Union, something he described as "complete madness".

That didn't stop the rout as Spain's stock market lost nearly five per cent, while Germany's DAX lost more than two per cent and France's CAC and London's FTSE fell three per cent. Asian markets fell by similar margins as investors sought refuge in US Treasury bonds.

What happens next is unclear, says Wolf, but it doesn't look good.
"The attempted rescue of Greece is just the beginning of the story.
Much more still needs to be done, in responding to the immediate crisis and in reforming the eurozone itself, in the not too distant future." ·