European stocks fall further

Global stock markets tumbled yesterday and the euro wilted further in the face of deadly anti-austerity protests in Greece seen as threatening a debt rescue for Athens and increasing the likelihood of contagion.

Pictures of violent demonstrations in Athens, where three people were killed in a bank firebombing, rattled investors who fear a €110 billion EU-IMF bailout for Greece could prove insufficient and will fail to shield Spain and Portugal from crippling market pressures.

"The social situation will remain very challenging as long as the economy continues to perform badly and unemployment remains high," said IHS Global Insight analyst Diego Iscara.

"Worryingly, this is the most likely scenario. Increasing social tensions will not only risk the stability of the government but they also mean that the reforms the economy badly needs to be more competitive and sustainable will be more difficult to achieve."

The deeply unpopular wage cuts and tax hikes the Greek government wants to implement would be in exchange for eurozone and International Monetary Fund loans to help Greece pay off its huge debts.

The deal was approved by eurozone finance ministers last Sunday and is awaiting final backing from their Parliaments.

But market reaction since then has been resoundingly negative.

In the wake of big losses on Tuesday the FTSE 100 index fell a further 1.28 per cent to close at 5,341.93 points. In Paris the CAC 40 fell 1.44 per cent to finish at 3,636.03 while in Frankfurt the DAX lost 0.81 per cent to end at 5,958.45 points.

Elsewhere there were losses of 2.27 per cent in Madrid, 3.9 per cent in Athens, 1.27 per cent in Milan and 1.52 per cent in Lisbon.

Asian markets lost ground and Wall Street too was not immune to the Greek debacle. The Dow Jones Industrial Average was down 0.27 per cent at 10,897.22 at midday, when the Nasdaq composite had shed 0.65 per cent to reach 2,408.43.

"The fixation on the European situation is unmistakable," said Patrick O'Hare of Briefing.com.

The euro remained under heavy pressure, sliding to $1.2887 from $1.2988 late on Tuesday in New York. The single currency at point fell to $1.2804, its lowest reading since March 12, 2009.

"The announcement of the Greek (rescue) package has failed to break the negative momentum in asset markets and it is unclear what can stabilise sentiment," said Adarsh Sinha of Barclays Capital.

He said a strong and positive statement today from the European Central Bank following a meeting of its policymakers could help calm jittery nerves, "as would the smooth disbursement of aid to Greece over the next few weeks".

"But medium-term concerns about the implementation of Greece's austerity measures and risks for other countries are unlikely to go away soon."

Contagion fears are focused on Spain and Portugal, both of which are saddled - like Greece - with big public deficits and are considered vulnerable to the sort of speculative market attacks that have targeted Athens.

Both countries suffered a ratings downgrade last week from Standard & Poor's. But the debt burden carried by Spain and Portugal is considerably less than that on Greece.

"Even if the situation of state finances in Portugal and Spain is not remotely comparable with the situation in Greece, it is becoming increasingly obvious that the aid for Greece has solved a short-term problem while longer term issues may not have been banished," said experts at Commerzbank.

"In any case, markets seem to have made up their mind about the Eurogroup's approach towards the crisis and have clearly not been convinced."