World stocks retreat on Greek default worries

Stocks plunged and the euro fell on Monday as signs of German impatience with Greek debt woes and fears over French banks compounded worries that the world is set for another recession, analysts said.

Wall Street fell less sharply than the steep drops in Europe. Tokyo struck its lowest close in 29 months after the G7 group of rich nations admitted that current economic problems were so complex that a unified response was impossible.

French banking shares dived more 10 percent on concerns that Moody's credit rating agency might downgrade their ratings because of the amount of Greek debt bonds they hold.

"The political theatre playing out in Europe continues to drive investors towards the exits with policymakers adopting an increasingly tough line with respect to Greece as bailout fatigue in northern Europe starts to manifest itself alongside austerity fatigue in southern Europe," Michael Hewson of CMC Markets in London said.

At close in Europe, Paris' CAC 40 index of leading shares fell 4.03 percent to 2,854.81 points. In Frankfurt, the DAX slid 2.27 percent to 5,072.33 points and in London the FTSE-100 index dropped 1.63 percent to 5,129.62 points.

Elsewhere in Europe Milan dropped 3.89 percent, Madrid 3.41 percent, Lisbon 4.2 percent and Brussels 3.06 percent.

The euro slid to 103.90 yen -- the lowest level since 2001. It later pulled back to 105.32 yen, which compared with 105.91 yen on Friday.

On Wall Street in early afternoon trade, the Dow Jones Industrial Average sank 0.66 percent to 10,990.01 points, the broader S&P 500 fell 0.61 percent to 1153.50 points, while the tech-heavy Nasdaq Composite was flat at up 0.08 percent to 2442.86 points.

Lee Hardman, currency economist at The Bank of Tokyo-Mitsubishi UFJ said the intensifying sell-off in both the euro and risk assets in general reflected "heightened investor fear that Greece is on the verge of defaulting which could plunge the weak global economy back into another Lehman-esque recession."

"Hopes for coordinated action from the G7 finance ministers over the weekend to restore confidence to financial system predictably fell short of expectations."

Europe's single currency dropped as low as $1.3495 -- the lowest point since February -- before recovering to $1.3648 almost unchanged from $1.3649 on Friday.

"Given how sharply it has dropped, the euro could easily experience a short squeeze over the next few days and respond positively to any news events that don't suggest an imminent crisis. However, we doubt that a sustained rebound is in the cards over the next few weeks," analysts Greg Anderson and Valentin Marinov at CitiFX said.

The flight to safety drove down the yields on 10-year bonds issued by Germany and the United States to historic low levels. Borrowing prices fell for France as well.

At ING Debt Strategy, analyst Alessandro Giansanti also noted the shock to sentiment of the announcement on Friday that the chief economist at the European Central Bank, Juergen Stark would step down early.

Giansanti, noting that this was rumoured to be because of "personal disappointment with the ECB purchasing of Italian and Spanish bonds," said it had sparked heavy selling of bonds issued by eurozone countries in trouble.

Bank watchers suggested his exit showed that the ECB was deeply split over its approach to handling the sovereign debt crisis.

Greece announced on Sunday two billion euros ($2.7 billion) in budget cuts demanded by the EU and the IMF to unlock more funds under its 110-billion euro rescue package to avoid a default.

EU Economy Commissioner Olli Rehn welcomed the move, but European finance ministers are split over how to deal with obstacles holding up a second 160-billion-euro bailout for Greece, agreed in principle in July.

With Athens having difficulty meeting its commitments to receive further rescue funding, on Saturday, Der Spiegel magazine reported that the German government was preparing two contingency plans in the event of a Greek default.

"What would never have been contemplated a few months ago is now being openly discussed, as talk gathers pace of Germany looking towards a plan B to recapitalise and protect its banks in the event of a Greek default," analyst Hewson said.

The Tokyo stock market tumbled 2.31 percent on Monday to close at its lowest level for almost 2.5 years, with exporters again feeling the most pain as the euro sank against the yen.


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