G7 talk on Greece fails to soothe investors, euro dips

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The euro and growth-linked currencies fell on Monday as investors unwound risky trades amid growing worries about eurozone's debt problems, dismissing assurances from European finance ministers at the weekend.

European ministers told their counterparts at a Group of Seven meeting on Saturday they would make sure Greece sticks to its budget-cutting plan.

But analysts said Europe needs to go beyond words to restore confidence among investors worried that problems in Greece, Portugal and other weaker euro zone states could upset or derail the global economic recovery.

"What I think is needed is an agreement on behalf of the EU to provide further support for Greece to further ensure that it doesn't default," said Michael Woolfolk, senior currency analyst at Bank of New York Mellon.

The euro fell 0.3% from late US Friday levels to USD 1.3636, edging back towards an 8-½ month low hit on Friday. The single currency has shed around 10% from a 15-month high of USD 1.5145 in late November.

Growing euro zone problems also soured the appetite for currencies like the New Zealand dollar and the Australian dollar, which are dependant on global economic growth.

The kiwi fell to a low of USD 0.6857, just off USD 0.6807 struck in Friday's offshore trade, its lowest since September 4.

Japan's Nikkei average fell below the 10,000 mark, hovering just above the crucial 200-day moving average, as exporters like Sony Corp were clobbered by a strong yen, which has climbed to multi-month peaks against currencies like the Australian dollar and the sterling.

The yen, traditionally seen as a safe haven in times of market turmoil, has gained 4% against the dollar so far this year as investors fretted about the sustainability of the global economic recovery and moved out of riskier assets.

Asia Pacific shares outside Japan as measured by MSCI hovered around their lowest levels since mid-September.

"Sovereign risks in Europe are coming to the fore, and stocks and commodities are falling almost in unison," said Kenichi Hirano, operating officer at Tachibana Securities.

"That shows there are many funds who have been encouraged by the current liquidity but now they're pulling out due to mounting risks regarding liquidity."

Last week, the cost of insuring debt from the three eurozone countries jumped as Greece's debt woes was put on the agenda of the meeting of G7 rich nations' finance ministers and central bankers in Canada's remote north.

European Central Bank President Jean-Claude Trichet issued a statement to express confidence in the Greek deficit-cutting plan, while US Treasury Secretary Timothy Geithner said the Europeans "made clear to us they will manage this with great care."

The idea of a Greek bailout by the International Monetary Fund was quashed at the G7 meeting by Jean-Claude Juncker, chairman of the euro zone finance ministers' group.

Some investors saw that as a sign that Europe might be preparing financial support for Greece although European leaders would have to settle differences about setting a precedent for bailing out members of the euro zone.

"The problem in Europe is that there is not a single Treasury secretary that will coordinate that," said Axel Merk, president of Merk Investments in Palo Alto, California.

Analysts at investment bank UBS said before the G7 meeting that an IMF rescue of Greece would be the best solution.

"An EU bailout that is half-hearted in its fiscal assistance would damage the euro zone's credibility even further," they said.

Under European Union law, member states cannot assume debt of other members. The EU's options include: faster disbursement of regular aid to Greece; issuing debt backed by the full euro zone to give Greece a share of the proceeds; and the purchase by EU governments or by the European Investment Bank of Greek debt on the markets.

Testing week for Greece

Greece can show investors this week whether it can tighten its belt when the government announces plans to raise taxes and control public wages - key details of its promised austerity drive.

In a challenge to the Socialist government, the country's civil servants will stage a 24-hour strike on Wednesday. The country's finance minister said Athens would stand firm.

Concerns about budget deficits are not limited to the euro zone, with the United States now set to run up a budget deficit of 10.6% of gross domestic product this year after spending heavily in an effort to rescue its economy.

Canadian Finance Minister Jim Flaherty, after hosting the G7 meeting, said governments were starting to look at scaling back their support and returning to fiscal health.

But the global economy was not recovering fast enough for governments to withdraw stimulus measures now, he added.

Credit ratings agency Moody's Investors Service last week said the United States must do more to restore its fiscal health to preserve its AAA credit rating, although US Treasury chief Geithner on Sunday dismissed concerns the country might eventually lose its top rating.

G7 ministers also said they backed the notion of a global tax on banks to help pay for financial bailouts, an idea first floated last year which seems to be gaining momentum as the Obama administration takes a tougher line on Wall Street.

Boris Schlossberg, director of foreign exchange research at GFT in New York, said the bank tax idea could be another cause for concern for investors on top of the euro zone's problems.

"So the net result of all this is not a boost of confidence in the capital market," he said. "We may see a little more turbulence going forward. Overall, the G7 meeting, instead of reassuring the market may have simply created more angst."