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European markets hardly hit by new doubts on Greece debts

European financial markets have been hit by renewed fears over the state of Greece's debt-ridden economy.

European markets hardly hit by new doubts on Greece debts

European financial markets have been hit by renewed fears over the state of Greece's debt-ridden economy. Banking stocks in particular, both in Greece and other European countries, have seen sharp falls. Meanwhile on the bond markets, the Greek government's cost of borrowing has risen to record levels. This reflects investors' concerns that loans to Greece might not be paid back due to the poor state of the country's public finances. The Athens Composite index fell by 3.1%, with banks down 6.4% on average.

All major European markets also suffered, with the UK's FTSE 100 index down 0.9%, Germany's Dax slipping 0.8% and France's Cac 1.2% lower. Banks in France and Germany were also hit due to their exposure to Greece, with Societe Generale losing 3.1% and Commerzbank down 2.8%. Greece is currently faced with debts of nearly 300bn euros (£267bn, $407bn), and is currently running a budget deficit equivalent of 12.7% of GDP. Its recovery plan involves borrowing on the bond markets and a harsh programme of spending cuts and higher taxes.

But on Thursday, the yield on Greek government debt hit a new high of 7.5%, a full 3% higher than in October last year. The yield is the interest rate the government has to pay on its bonds to attract investors. The closely-watched difference between the yield on Greek debt and German debt - which has the lowest rate in the eurozone - also hit a fresh high. This reflects the doubts among investors that the Greek government can succeed in its plan to slash its deficit, and makes it more likely that the state will turn its eurozone partners for help.

Last month, the eurozone and the International Monetary Fund (IMF) agreed to provide Greece with a 22bn-euro safety net should it struggle to raise the money it needs from the financial markets. At a press conference following the European Central Bank's (ECB) decision to keep interest rates at 0.5%, president Jean-Claude Trichet repeatedly insisted that the ECB supported the EU-IMF deal. "I take it as a very, very serious commitment," he said. But he stressed that what was important was that the austerity programme announced by the Greek government was implemented. "I have no reason to think it will not be," he told reporters. But he added: "We remain alert". Asked whether he thought Greece might default on its debt he said: "Taking all the information I have, a default is not an issue for Greece."

When the joint rescue plan was agreed, it was hoped the promise of support would be enough to calm investors' nerves. Shortly after the deal, the Greek government successfully raised 5bn euros ($6.7bn; £4.5bn) through issuing bonds. But Greece's continuing problems, in particular rising yields on government debt, show that next time might prove more difficult. "Despite everything the EU and the eurozone have done, there is still a lack of clarity [and] confusion about what they intend to do, when they intend do it and how much would be involved," said Chris Pryce, senior Greece analyst for rating agency Fitch. "It is now up to the Greek government to go publicly to the EU and IMF and ask for the cash and the support."

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