German officials rushed today to calm highly stressed markets, insisting Greece should stay in the euro zone, amid rising alarm that Germany is losing patience with being the bail-out paymaster.
A raft of comments by senior German politicians raising the spectre of an "orderly default" for Greece and even an ignominious euro zone exit sent the euro downwards as traders worried the debt crisis was worsening.
But a spokesman for Germany's Economy Minister Philip Roesler, who is also vice chancellor, sought to allay these fears, saying: "Our common goal is the stability of the euro and we want Greece to stay in the euro."
At the same news conference, Chancellor Angela Merkel's spokesman said that Germany "assumes that Greece is doing everything it can" to implement strict austerity measures to battle its deficit woes. "Our goal is quite clear: We want to stabilise the eurozone as a whole," Steffen Seibert said.
Roesler himself had contributed to the market fears by writing in an opinion article in today's edition of the conservative Die Welt daily that Europe could no longer rule out an "orderly default" for Greece.
"To stabilise the euro, we must not take anything off the table in the short run," Roesler wrote.
Both German and US 10-year bond yields also hit historic low points as investors shunned risky deals and bought assets seen as safe during times of financial turmoil.
Also fuelling financial market fears was an article in Der Spiegel news weekly reporting that Finance Minister Wolfgang Schaeuble doubted that Greece can avoid a default. Spiegel said that finance ministry officials in Berlin were considering two scenarios should Greece go bankrupt: one where the country stays in the euro zone and another where it introduces its former currency, the drachma.
Despite seeking to calm the waters, Berlin stuck to its tough line that Athens needed to fulfil its international commitments to receive its next tranche of aid.
"Our line on Greece is clear: We will help, but only under strict conditions," said Seibert. If Greece is not able to live up to its commitments, "then the next tranche cannot be paid. That is quasi-automatic," he said.
Euro and markets fall on Greek fears
The euro has fallen to its lowest level in seven months as investors fret over the possibility of an imminent Greek debt default and further signs of division within Europe's policymaking circles over how to deal with the country's crippling debt crisis.
The euro was trading at $1.3602 this afternoon, an improvement from earlier lows of $1.3495 - its weakest level since the middle of February.
The euro had been trading at $1.43 mark at the start of September.
Over the past few days, financial markets have grown increasingly convinced that Greece will end up having to default on its debts. German officials have also raised the specter of a potential Greek exit from the euro zone.
World markets tumbled today as investors appeared to dismiss weekend promises by Greece on deficit cuts as too little too late, while worrying about stretched European banks.
In Paris, the CAC 40 index of leading shares fell 4.03% to 2,854.81 points at the close.
In Frankfurt, the DAX slid 2.27% to 5,072.33 points, and in London the FTSE-100 index dropped 1.63% to 5,129.62 points. Milan dropped 3.89% and Madrid 3.41%.
In Dublin, the ISEQ index lost 62 points to close 2.5% lower at 2,382.
Earlier in Asian trade, Tokyo's Nikkei index closed 2.3% lower with exporters again feeling the most pain as the euro sank against the yen. The Hang Seng index in Hong Kong slumped 4.2%.
Debt-ridden Greece yesterday announced €2 billion in new budget cuts demanded by the EU and the IMF for its rescue package, as Germany warned a Greek "orderly default" could not be ruled out.
EU economy commissioner Olli Rehn said yesterday that a team of experts would head to Athens in the next few days to look at a new tranche of Greece's 2010 rescue package.
"Once Greece meets the conditions, I expect the review by the troika could be concluded by the end of September," he said, referring to the European Commission, the European Central Bank and International Monetary Fund.
The three lenders had left Greece earlier this month because of the government's lack of progress on deficit reduction and meeting conditions for the next tranche of its 2010 bail-out plan.
Adding to ongoing concerns about the euro zone debt crisis was the unexpected resignation of Germany's Juergen Stark, the ECB's chief economist and a member of the executive board, well before the end of his term of office in May 2014. ECB watchers suggested that his exit shows the central bank is deeply split over its approach to handling the sovereign debt crisis.
A closely watched meeting of the Group of Seven finance chiefs' meeting at the weekend ended without any concrete conclusions, which also dampened sentiment, dealers said.
