Speculation grows over Greek default

INTERNATIONAL alarm over Europe’s debt crisis reached new heights yesterday with US President Barack Obama pressing the bloc’s big countries to show leadership as talks of a Greek default escalated and markets heaped pressure on Italy.

German chancellor Angela Merkel sought to quash talk of an imminent Greek default or exit from the eurozone, but confusion over whether she would issue a joint statement on Greece with French President Sarkozy sent markets up, then down.

Confidence in the 17-nation eurozone was further dented when Italy was forced to pay the highest interest rates since joining the euro in 1999 to sell five-year bonds.

Merkel said Europe was doing everything in its power to avoid a Greek default and urged politicians in her own coalition to weigh their words carefully to avoid creating market turmoil.

Her economy minister said earlier this week that there should be no taboos in stabilising the euro, including an orderly bankruptcy of Greece. Lawmakers from her coalition said Greece may have to leave the eurozone — a move Citigroup’s chief economist warned would lead to “financial and economic disaster”.

“As soon as Greece has exited, we expect the markets will focus on the country or countries most likely to exit next from the euro area,” Willem Buiter said.

Merkel told RBB inforadio that Europe would use all the tools at its disposal to prevent a Greek default and warned that an exit from the bloc would immediately lead to “domino effects”.

“We face a completely new challenge, one that has no historic precedent,” she said. “We want our currency to succeed. Germany is absolutely committed to this currency.”

Merkel and Sarkozy conferred by telephone on the crisis at the start of the week, and senior French sources told Reuters they planned to issue a joint statement on Greece, sending the euro and Greek bank stocks higher.

Less than an hour later, a spokesman for Sarkozy changed course and denied a statement was planned, sending markets into reverse.

German officials told Reuters the government in Berlin saw no need for a statement as Merkel and Sarkozy are due to hold a call with the Greek prime minister today.

The mixed signals reinforced the sense in the markets that European countries are unable to find a common approach.

Obama said eurozone leaders need to show they were taking responsibility for the debt crisis. Weakness in the global economy would persist so long as it is not resolved, he said.

“In the end the big countries in Europe, the leaders in Europe must meet and take a decision on how to coordinate monetary integration with more effective co-ordinated fiscal policy.”

Meanwhile, EU sources acknowledged that staff in many eurozone countries were preparing contingency plans in the event of a Greek default; the Dutch have already said they are.

“It should be part of any good planning staff but it does not mean that this is what we are expecting to happen”, the source said.