Global markets were rattled on Tuesday by renewed fears that Greece is close to bankruptcy while tough talk from George Osborne on the UK’s position in Europe added to jitters about the region’s future.
The first cabinet member of the new Conservative government to visit Brussels, the chancellor met his fellow EU finance ministers to discuss the Greek financial crisis and the region’s economics. But Osborne used the opportunity to warn that Britain would be “resolute and firm” in seeking to repatriate powers before a referendum on whether the UK should quit the union.
“We come here with a very clear mandate to improve Britain’s relationship with the rest of the EU and to reform the EU,” said Osborne. “I don’t think anyone is now in any doubt that we will hold that referendum on British membership of the European Union having conducted these negotiations.
“We go into the negotiations aiming to be constructive and engaged but also resolute and firm and no one should underestimate our determination to succeed.”
His words received a mixed reaction from his colleagues and EU officials, who say they are keen to hear the British demands and want to avoid a confrontational negotiation about “red lines” and calls for reopening the union’s treaties.
“This is now high on the list of priorities,” said a senior official. “But it’s up to the British to define what they want.”
While last week’s shock Conservative victory has fanned fears of a British exit from the EU, the focus for most of Osborne’s counterparts around the region remains on the fate of heavily indebted Greece.
The country’s international lenders – the European Union, International Monetary Fund and European Central Bank – reported that progress remained painfully slow in negotiations over the reforms that creditors want to see from Athens before they unlock the latest tranche of bailout funds.
After Greece managed to make a €750m (£537m) payment to the IMF on Monday, there was cautious optimism that the country’s finances were not quite as stretched as feared. Those hopes were dashed on Tuesday as it emerged Greece had emptied an IMF holding account to find the money. Greece, like all IMF members, holds reserves from the IMF and must pay interest if those holdings are not kept at a certain level.
A Greek central bank official told Reuters the funds had been tapped to cover this latest host of payments due from Greece to lenders over coming months.
“The negative is that the account was emptied but, in order to avert a default, it was necessary to weigh the options,” the official told Reuters.
The ECB threw a modest lifeline to Greece on Tuesday when it stepped in again to increase the emergency funding available for Greek banks by increasing the cap on emergency liquidity assistance to €80bn.
Economists question how much longer Athens can continue to meet its heavy schedule of debt repayments as well as paying public sector wages and pensions. The fear is that without the €7.2bn of outstanding bailout money, Greece will end up defaulting on its debts and leave the eurozone.
Economists at Daiwa Capital Markets warned about the rising prospects of an “accidental default” by Greece in the absence of fresh funding. They wrote:
“The successful repayment will have reassured euro area finance ministers that the risk of a default to an official creditor has been banished only until next month. And as the repayment was largely funded by clearing out Greece’s IMF reserve account, which will also need to be replenished within a month, it has once again simply added to the arrears in other parts of the Greek public finances. And so, the Greek glass still looks half-empty, and four IMF loan repayments totalling €1.6bn will come in quick succession in mid-June to provide plenty of opportunities to miss a repayment.”
Investors said worries about Greece and the wider eurozone were compounded by volatility in global bond markets where yields spiked higher on Tuesday. That sent jitters through stock markets too, with share indices down around Europe. London’s FTSE 100 index of bluechip shares, which had hit a record high last month, fell 96 points, or 1.4%, to 6,933.8.
The pan-European FTSEurofirst 300 index closed down 1.3% at 1,574.61 and Germany’s DAX ended the day down 1.7%.
Some analysts put the sharp moves in bond yields down to the recent rebound in oil prices, which has alleviated worries about deflation taking hold. That in turn was prompting markets to adjust their forecasts for when the central banks would start to tighten policy again by raising interest rates.
Commenting on the rise in US government bond yields, Kevin Ferriter at the thinktank Capital Economics said: “One explanation may be that the rise in the oil price has been large enough to assuage concerns about deflation, but small enough not to choke off the recovery. Accordingly, it has given policymakers one less reason to hold fire.”
Yields on UK government bonds were also higher as traders tracked moves in German and US debt but also positioned themselves for the Bank of England’s latest inflation and growth forecasts on Wednesday. Bank governor Mark Carney could use his “inflation report” to warn markets they are too relaxed about the timing of future rate rises, economists warn.
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