Excitement over the eurozone’s mammoth 750 billion euros (US$1 trillion) rescue package gave way yesterday to doubts whether its weakest economies can meet their end of the bargain and deliver drastic debt cuts, driving the euro and stocks lower.
The emergency plan — the biggest since G20 leaders threw money at the global economy following the collapse of Lehman Brothers in 2008 — impressed markets on Monday with its sheer size and sparked a spectacular rally in world stocks and the euro.
Yet financial markets turned cautious when they reopened for business in Asia yesterday, with investors concerned that the plan was not a long-term solution to problems plaguing the 11-year old single currency area.
PHOTO: REUTERS
In a sobering note, the IMF said that even though Greece’s public debt was sustainable over the medium term, it still faced plenty of risks.
Moody’s credit ratings agency also warned it might downgrade Portugal’s debt rating and further cut Greece’s to junk status, noting the contagion effect of Greece’s crisis on other euro zone members.
“Contagion has spread from Greece — historically a weaker credit in the context of the euro zone — to sovereigns with stronger credit metrics like Portugal, Ireland and Spain,” Moody’s said.
Earlier in Asia, Tokyo closed down 1.14 percent and Hong Kong gave up 1.37 percent.
Shanghai closed at its lowest level in nearly a year as higher-than-expected Chinese inflation data and housing prices triggered fears of fresh credit tightening moves, dealers said.
In foreign exchange trade, the euro fell to US$1.2749 after spiking above US$1.30 on Monday. The single currency was also lower versus the pound and the yen.
“The [market] gains from the US$1 trillion bailout were short-lived as speculators foresee tough cutbacks for the troubled European states,” said Manoj Ladwa, senior trader at ETX Capital in London.
“The dollar rallied overnight as the debt problems in the eurozone and political uncertainty in the UK sends traders in search of a safe haven currency,” he said yesterday.
The debt crisis began as Greece teetered toward default, triggering fears that other weak economies such as Portugal, Spain and Italy may be next.
Greece was to ask the EU and the IMF yesterday for a first tranche of debt aid worth 20 billion euros, a finance ministry source said.
A first installment of the emergency loan package amounting to 14.5 billion euros from the EU and 5.5 billion euros from the IMF “should be available, possibly within the day,” the source said.
In Japan, the world’s most indebted industrialized nation, officials warned Tokyo could no longer take investors’ willingness to bankroll its spending for granted.
Japan so far has had no trouble financing its deficits, even as its public debt is forecast to reach 200 percent of GDP within a year or so, thanks to a vast pool of domestic savings and reliance on domestic investors to foot the bill.
However, this could change, Japanese Strategy Minister Yoshito Sengoku warned, saying financial markets may start taking note of Japan’s debt burden, while Finance Minister Naoto Kan said next year’s new borrowing should not exceed this year’s new bond sales.
“Japan needs to draw a lesson from Greece’s problems and to take steps on fiscal discipline with a stronger sense of crisis than before,” he told a news conference.
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