Markets Brace as the Crisis in Europe Flares Up Again

Fears over Europe's financial condition were heightened Sunday on doubt over the French banks and Germany's willingness to help Greece avoid a default. Greece has become a central point in financial problems in the Eurozone as many expect the economy to shrink at a faster pace than originally predicted.

By LIZ ALDERMAN and NELSON D. SCHWARTZ
Published: September 11, 2011
NY TIMES

Fears about Europe’s deteriorating finances intensified on Sunday as new doubts about the health of French banks, as well as Germany’s willingness to help Greece avert default, left investors bracing for another global stock market downturn this week.

In Greece, the epicenter of the Continent’s financial disarray, government officials announced new austerity measures on Sunday, even as the country’s finance minister, Evangelos Venizelos, warned that the Greek economy was expected to shrink much more sharply this year than previously anticipated. In a revision, a contraction of 5.3 percent in 2011 was predicted, rather than the 3.8 percent forecast in May.

Slower growth could make it harder for Greece to pay its debts, even as it tries to reduce them by cutting government spending and raising taxes.

While the Greek drama has been running for more than a year, only recently has it threatened French and German banks, unnerving investors around the world and sending stocks tumbling in Europe and the United States.

More than anything else, political and business leaders want to avoid the phenomenon of contagion, in which fears in one country spread to others, causing severe stress throughout the financial system, as happened in the fall of 2008. To be sure, Europe could still draw away from the precipice. That is especially true if policy makers come up with a plan to keep Greece afloat while also preventing anxiety from infecting other countries like Spain and Italy, whose huge debts and weak economies have fed worries that their borrowing has become unsustainable.

On Sunday, French government officials braced for possible ratings downgrades by Moody’s Investors Service of France’s three largest banks, BNP Paribas, Société Générale and Crédit Agricole, whose shares were among the biggest losers last week. The biggest banks in Europe, especially in France, hold billions of euros’ worth of Greek bonds, and investors fear even a partial default by Greece would sharply diminish the value of those assets, eroding already weak capital positions.

American financial institutions, typically heavy lenders to their French counterparts, have begun to pull back on these loans, but United States banks’ exposure to France remains substantial.

Still, if the French banks are indeed downgraded, it would underscore how European officials have been unable to contain the effect of the financial crisis in Greece, despite two bailout packages totaling more than 200 billion euros ($272 billion).

Frustration elsewhere in Europe has been mounting over whether Greece is sticking with the austerity goals it agreed to follow in order to qualify for the aid, and German voters in particular are wary of more handouts.

Despite repeated pledges by Chancellor Angela Merkel to keep Europe together, the cacophony of dissent within Germany has been rising. That is creating fresh doubt — justified or not — about the nation’s commitment to the euro.

“The German electorate is not in the mind-set to undertake actions it sees as subsidizing less worthy nations,” said Carl B. Weinberg, chief economist of High Frequency Economics in Valhalla, N.Y. “As a result, the government is moving in a very isolationist way to try to establish a fortress Germany that’s economically secure despite the risks in its European Union partners.”

On Friday, a stalwart German member of the European Central Bank, Jürgen Stark, abruptly resigned — news that would have barely merited more than a few lines in the financial pages just a few years ago. Today, it is considered a sign of frustration within Germany about the extraordinary measures being pursued to maintain stability in the euro zone, adding to the volatility in global financial markets.

“Mr. Stark’s departure could be seen by financial markets as another indication of growing disenchantment in Germany towards the euro,” Julian Callow, chief European economist at Barclays, wrote in a note to clients.

Last week, Mrs. Merkel’s finance minister, Wolfgang Schäuble, warned that Greece’s European Union partners would withhold new financial aid that is needed to help Athens pay its bills through Christmas unless the Greek government fulfilled the conditions of its first bailout.

All this has generated severe discomfort in Washington, which has watched the fallout from the European debt crisis with growing alarm.

Treasury Secretary Timothy F. Geithner has been in regular contact with his European counterparts, repeatedly advising them to speak with a single voice to help reduce confusion in financial markets. After a series of discussions on Friday at a meeting of the Group of 8 finance ministers in Marseille, he declared that “European officials fully understand the gravity of the situation there.”

Athens is expecting to receive the next allotment of 8 billion euros of aid from the 110 billion euro rescue package that Greece was awarded last year. That aid is to be supplemented by a second bailout of 109 billion euros that European leaders agreed to in July. But the second package is threatened by demands from a handful of euro zone countries, including Finland and the Netherlands, that Greece provide collateral to secure further loans.

Mr. Venizelos said the government would do everything needed to close the budget shortfall. “If we can prove wrong those who are betting on Greece to fail, we will see the crisis recede,” he said.

Among the measures Mr. Venizelos announced on Sunday was a temporary property tax, ranging from 50 cents to 10 euros a square meter, depending on the value of the property, which would be collected for two years. The levy will be added to electricity bills to thwart tax evasion.

Mr. Venizelos also warned that the government would make further cuts to public spending. In a largely symbolic move, the government said it would withhold a month’s pay from all elected officials.

“This is a battle for the country’s survival,” Prime Minister George A. Papandreou told a news conference in the northern port city of Salonika on Sunday. “These measures are the supplies we need to fight.”

Niki Kitsantonis and Ben Protess contributed reporting.

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