Shares fall as Greece says it will miss deficit targets

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Stock markets have fallen on news that Greece is likely to miss targets to cut its deficit.

Athens announced that the 2011 deficit was projected to be 8.5% of GDP, down from 10.5% in 2010 but short of the 7.6% target set by the EU and IMF.

The government, which on Sunday adopted its 2012 draft austerity budget, blamed the shortfall on deepening recession.

Emergency talks at Franco-Belgian bank Dexia added to fears that a Greek default could spark a banking crisis.

The bank's board called an emergency meeting late on Monday as rating agency Moody's announced it was reviewing the bank's credit rating for a downgrade because of its exposure to Greek debt.

Meanwhile, the French and Belgian finance ministers are expected to discuss rescue options at a meeting of eurozone ministers in Luxembourg.

Default risks

Inspectors from the International Monetary Fund (IMF), European Union (EU) and European Central Bank are in Athens to decide whether Greece should get a key bailout instalment.

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Equity and debt markets haven't imploded today, but my goodness bankers are feeling jumpy.”

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Greece needs the instalment of 8bn euros (£6.9bn; $10.9bn) to avoid defaulting on its debts this month.

A decision by Greece to stop repaying its debts would put severe pressure on the eurozone, damage European bank finances and possibly have a serious knock-on effect on the world economy.

Markets fell sharply at the open of trading in Europe on the weekend news from Greece, but recovered later in the day.

The UK's FTSE 100 lost 1% by the close of trading, French shares fell 1.9%, and German stocks shed 2.3%.

The euro also suffered, falling 1.5% against the dollar by late evening trading to $1.319, and dropping 2% to a decade-low of 101 yen against the safe-haven Japanese currency.

Greek students protesting against cuts clashed with police

Financial stocks

Markets were buoyed by stronger-than-expected manufacturing and construction data from the US.

However, as the drama at Dexia continued to unfold, shares began to slide again in US trading hours.

By the close in New York, the Dow Jones Industrial Average had fallen 2.4%, with banking and industrial stocks worst hit.

The banks seen as most at risk from a renewed global financial crisis fell sharply, with Citigroup down 9.8%, Bank of America 9.6% and Morgan Stanley 7.7%.

US markets are now right at the bottom of the 10% range within which they have swung violently up and down for the last two months.

Banking stocks were also among the biggest fallers in Europe, on concerns about their exposure to Greek government debt.

Crisis jargon buster
Use the dropdown for easy-to-understand explanations of key financial terms:
AAA-rating
The best credit rating that can be given to a borrower's debts, indicating that the risk of borrowing defaulting is minuscule.

Dexia initially fell as much as 14%, but recovered to be only 10.1% down by the close of European trading.

France's Societe Generale was down 5.2%, BNP Paribas fell 4.6% and Credit Agricole dropped 3.8%, while in Germany, Commerzbank fell 7.3%.

In the UK, shares in Barclays were down 3.2% and Royal Bank of Scotland fell by 4.4%.

Investors were also unnerved by data from the Markit purchasing managers' index showing that manufacturing activity in the eurozone had shrunk at its fastest pace in two years in September.

'Unanimously approved'

The Greek finance ministry said on Sunday that its unpopular austerity measures would have to be adhered to.

It said: "Three critical months remain to finish 2011, and the final estimate of 8.5% of GDP deficit can be achieved if the state mechanism and citizens respond accordingly."

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Until we get a bigger and better package coming through [from eurozone leaders] trading will remain volatile”

End Quote Alec Letchfield HSBC Asset Management

It released figures for 2012's projected deficit, putting it at 6.8% of GDP, also short of the 6.5% target.

The data came as the government met to approve Greece's draft budget for next year.

It blamed an economic contraction this year of 5.5% - rather than May's 3.8% estimate - for the failure to meet deficit targets.

The cabinet meeting also approved a measure to put 30,000 civil service staff on "labour reserve" by the end of the year.

This places them on partial pay with possible dismissal after a year.

"The labour reserve measure was approved unanimously," one deputy minister told Reuters.

This measure, along with other wage cuts and tax rises, have been part of a package intended to persuade the so called "troika" of the EU, IMF and ECB to continue with its bailout.

Strikes wave

Eurozone finance ministers are meeting in Luxembourg, where they will discuss Greece's progress towards putting its finances in order.

They are expected to get updates from EU Economic and Monetary Affairs Commissioner Olli Rehn on the IMF's position.

Crisis Countdown

  • 3 Oct: Original deadline for Greece to receive next 8bn-euro tranche of bailout funds;
  • Next few days: Troika decides whether to recommend that Greece gets the next tranche;
  • 9 Oct: Leaders of Germany and France to hold talks;
  • 13 Oct: European authorities due to decide whether to release bailout money to Greece;
  • 14-15 Oct: G20 finance ministers meet in Paris;
  • 17 Oct: Slovakia votes on whether to expand the European Financial Stability Facility. Members of the coalition government have vowed to block expansion;
  • 17-18 Oct: European Union summit in Brussels;
  • End of Oct: Greece to get next bailout money - assuming no more hurdles;
  • 3-4 Nov: G20 summit in Cannes, France. World leaders, including Barack Obama, want evidence that Europe have got control of debt crisis.

The meeting will also discuss beefing up the European rescue fund and the recapitalisation of banks.

Analyst Alec Letchfield, chief investment officer at HSBC Asset Management, said markets would remain turbulent until eurozone leaders tackled the debt problem.

"Until we get a bigger and better package coming through trading will remain volatile," he said.

Earlier on Monday there was confusion over whether the troika had finished its budget negotiations with Athens.

Greek Deputy Finance Minister Pantelis Oikonomou said that the discussions were complete, but the Reuters news agency subsequently reported that talks were continuing.

The Greek austerity measures are hugely unpopular at home and have led to a wave of strikes and protests.

Many Greeks believe the austerity measures are strangling any chance of growth.

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