World shares fell today amid growing concern that Greece may be moving close to default while a European Commission report warned sovereign debt levels will continue to increase through next year.
The report said many governments were continuing to struggle with the aftermath of the recession.
"The overall economic situation remains fragile" and "in some countries the recovery is yet to be felt," the commission said in its 2011 Report on Public Finances today. "The years of the crisis left behind a legacy, not just of support measures that need to be reversed, but of lasting weaknesses to the public finances."
The commission sees average euro zone state debt rising to 88.7 per cent of gross domestic product in 2012 from 87.9 per cent of GDP this year, today's report showed.
Greece's debt burden may swell to 166.1 per cent of GDP from 157.7 per cent, making it the highest in the region.
Italy may have the second- highest debt level in 2012, it said. European equities were down by around 3 per cent today, after sharp falls in Asian markets overnight.
As markets digested the news of the surprise resignation of ECB executive board member Jürgen Stark, European shares hit a 26-month low this morning. The euro dropped to its lowest level since 2001 against the yen and oil declined for a third day in New York, the longest losing streak in a month.
In the US, the Dow Jones industrial average fell 70 points, or 0.6 per cent, to 10,921 this morning. It had been down as many as 135 points shortly after the opening bell. The Standard & Poor's 500 index fell 6, or 0.5 per cent, to 1,148. The yield on 10-year Treasury notes reached another record low as investors piled into US government debt.
French banking stocks were among the most affected today, with BNP Paribas, Societe Generale and Credit Agricole sliding more than 9 per cent amid concern that French banks may be downgraded by Moody's.
Worries that Greece may default on its debts rose after finance ministers of the Group of Seven (G7) industrialised economies pledged a co-ordinated response to the global slowdown but offered no specific steps to support their economies.
"Worries over the future of the euro zone and over much slower growth are putting enormous pressure on commodity prices," said Christophe Barret, global head of oil research at Credit Agricole in London.
German chancellor Angela Merke is holding talks on the debt crisis with European Commission president Jose Manuel Barroso today. Officials in her government are debating how to shore up German banks in the event that Greece fails to meet the budget-cutting terms of its aid package and is unable to get a bailout-loan payment, three coalition officials.
Greek prime minister George Papandreou approved new measures over the weekend to help plug a yawning budget gap as resistance builds at home and in Europe to extending more aid to the European Union's most-indebted nation.
The Greek Cabinet yesterday voted to cut one month's wages from all elected officials and impose an annual charge on all property for two years, to be levied through electricity bills to ensure rapid collection. The measures will help the country meet deficit targets of €17.1 billion in 2011 and €14.billion in 2012, covering a €2 billion shortfall for this year that has been exacerbated by a deepening recession.
Investors fears were compounded over the weekend by the lack of detail arising from a meeting of the Group of Seven finance chiefs over the weekend on how to boost the struggling economies , while German politicians were increasingly talking about a potential Greek default.
The departure of Jürgen Stark, who had opposed the bank's decision to buy Italian and Spanish bonds, has also unsettled the markets and sent the single currency to its lowest level for six months on Friday.
In an interview with The Irish Times hours before his resignation, the 64-year old revealed that the European Central Bank is pressing the Government to cut public sector pay in the budget next December and accelerate its austerity drive.
The ECB wants social welfare entitlements reviewed and is also calling for greater efforts to facilitate pay cuts in private employment contracts.
Mr Stark also said the Government should capitalise on improving market sentiment towards Ireland by "frontloading" cuts outlined the EU- IMF bailout plan. He pointed out that civil service pay in many of the countries supporting the Irish bailout is considerably lower than in Ireland. "Together with Greece, Ireland is still ranking top," he said. "This needs to be corrected."
The ECB wants the Government to begin cutting pay in the 2012 budget and to continue in 2013.
Additional reporting: Reuters/Bloomberg
