Markets still doubt Greece

A RECORD €110bn (£95.2bn) bailout deal for debt-stricken Greece met with widespread wariness on European markets yesterday.

European investors yesterday vocied concerns that Greece’s resolve to implement austerity measures would crumble under political pressure and an inability to match fiscal tightening with complementary monetary policy alterations.

“Germany is pulling away from the peripheral [eurozone countries] and this will make it harder for the latter to escape a potential debt trap,” said Graham Turner at GFC Economics.

“Germany’s persistent trade surpluses, as its exports recover more quickly, will underpin the euroland current account and prevent a bigger depreciation in the euro, which might ease the burden of adjustment in countries such as Greece,” he added.

Other analysts warned that sending a signal to Greece could trigger a queue of indebted European nations coming cap-in-hand to the IMF.

“The key question now is still whether or not contagion will spread and if it will pick up the UK in the backwash,” said Jeremy Batstone-Carr, an analyst at Charles Stanley. “If there is no clear plan to reduce government debt soon, then it could be that the markets, which never take any prisoners, will decide enough is enough.”

European shares initially fell back yesterday before recovering to track gains on Wall Street as a rise in US consumer spending injected a dose of optimism over an economic recovery.

Yields on Greek bonds eased back around 40 basis points to hover around 9.1 per cent, buoyed by the ECB’s decision to accept sub-investment grade Greek government bonds as collateral for loans even in the case of further ratings downgrades.

The European Central Bank's Yves Mersch said yesterday that the measures taken by euro zone countries to help debt-stricken Greece were "very comprehensive and solid".

Mersch was speaking in Bahrain just after the bailout was announced.