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Greek debt fears hit global markets

Mounting fears over Greece’s debt position spilled into global equity markets last week, as share prices in America, Asia and several European countries all fell.

On Wednesday the European Commission endorsed the Greek government’s list of measures aimed at reducing its huge fiscal deficit.

Measures included increases in fuel duty and a public sectaor pay freeze. The second measure was met with protests by Greek public sector workers, with custom officials and tax collectors staging a two-day strike.

Despite receiving backing from the EC, the package of reforms to address Greece’s 12.7 per cent deficit did little to reassure global stockmarkets with share prices continuing to fall.

Based on fears that Greece, Portugal, Spain and the other most indebted countries will struggle to fund their national deficits, investors ended last week fleeing from holding risky assets.

According to EPFR Global, a firm that tracks fund flows, investors withdrew about $1bn from global emerging market funds in the week ending February 3. This is the most in over one year, and of this, $516m was removed from Asian equities excluding Japan.

In Asia share prices fell by the largest amount in 10 weeks, with Japan’s Nikkei falling by about 3 per cent on Thursday. Meanwhile in America the Dow Jones fell 2.6 per cent.

“You don’t have to think that Greece is actually going to default, or have to be bailed out, to worry about the wider implications,” says Julian Jessop, chief international economist at Capital Economics. “The need for fiscal tightening in Greece is particularly pressing, but others will eventually have to follow. This is another reason to fear that the global economic recovery will disappoint.”

However, Andrew Milligan, the head of global strategy at Standard Life Investments, says other wider problems also caused investors to sell their risky assets. These include a higher than expected rise in the number of Americans claiming jobless benefits, muted global service sector reports and the expectation of monetary policy tightening in China.

The American data was later contradicted when it was announc ed that unemployment fell month-on-month in January.

As sentiment fell and concerns about the eurozone grew, the euro fell to its lowest level against the dollar for more than eight months.

Meanwhile, the average spread of the sovereigns of Greece, Portugal, Spain and Ireland is almost triple that of the main index of 125 European Corporates, says Mark Holman, a managing partner at TwentyFour Asset Management, a specialist credit firm.

“These sovereign moves are of such magnitude that will now affect the price of all credit risk in the developed world, with corporates and financials being the nearest targets,” says Holman. “It is no surprise that global equity markets are now awakening to this potential risk.”

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