International alarm over euro zone crisis grows

Thursday, 15 September 2011 00:00 - - {{hitsCtrl.values.hits}}

Reuters: - International alarm over Europe’s debt crisis hit new heights on Tuesday, with U.S. President Barack Obama pressing the bloc’s big countries to show leadership as talk 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 euro zone, but confusion over whether she would issue a joint statement on Greece with French President Sarkozy sent markets gyrating up and then down.

Confidence in the 17-nation currency area was further dented when Italy was forced to pay the highest interest rates since joining the euro in 1999 to sell 5-year bonds.

“I think there is a possibility, if the wrong steps are taken, that the system goes off the rails,” Sergio Marchionne, the CEO of Italian carmaker Fiat, told reporters in Frankfurt when asked if the euro’s survival was at risk.

Merkel said in a radio interview that 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 turmoil on financial markets.

Her economy minister said earlier this week that there should be no taboos in stabilizing the euro, including an orderly bankruptcy of Greece. And lawmakers from her coalition have said in recent days that Greece may have to leave the euro zone -- 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 in a note published on Tuesday.

Merkel, in an interview with RBB inforadio, said 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.”

In financial markets, stocks and the euro rose on Tuesday on hopes Europe’s top powers will supply fresh support for Greece.

MSCI’s all-country world equity index rose 0.9 percent and Wall Street rebounded. The Dow Jones industrial average closed up 44.73 points, or 0.40 percent, at

11,105.85. The Nasdaq Composite Index gained 37.06 points, or 1.49 percent, at 2,532.15.

Merkel and French President Nicolas Sarkozy conferred by telephone on the crisis at the start of the week, and senior French sources told Reuters they would 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.

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