Strike-hit Greece was in shock Thursday amid new budget cuts to avoid imminent default, as global markets were in retreat over forecast downturns in the United States and the eurozone.
The U.S. Federal Reserve failed to restore confidence with a $400 billion boost to the U.S. economy, but top financial bodies urged the European Union to get on top of its debt crisis and recapitalize its banks.
A key EU leading indicator pointed on Thursday to the first contraction of eurozone business activity for more than two years.
Systemic strains in the banking system, mainly in Europe, are a central concern as the IMF holds its annual meeting in Washington, with calls for recapitalization now coming from the European Commission in a sudden switch to support the view of the International Monetary Fund.
The latest measures imposed on Greece by the European Union and IMF cut pensions and some tax advantages and put 30,000 state employees temporarily out of work.
The cuts were preconditions for EU-IMF auditors to resume work on whether Greece merits 8.0 billion euros ($11.0 billion) in the next slice of a first rescue, to avoid default in mid-October.
In Athens, where the government has vowed that Greece will do “anything” to ensure it stays in the eurozone, a strike brought public transport to a halt, backed also by teachers, municipal workers and taxi drivers. Air traffic controllers were also to stop work.
“We are obliged to resist,” the head of staff in the Athens subway Antonis Stamatopoulos told state television NET. “Not even Greece’s German and Turkish conquerors imposed such taxes.”
The head of the Athens chamber of commerce, Constantinos Michalos, said: “Greece is being turned into a poverty house.”
Global stocks plunged in reaction to the Federal Reserve’s stimulus plan and also because of deep concern about contagion from the Greek crisis and strains in the banking system.
In early trading, leading European stock markets were down by 3.0-4.0% and the euro fell heavily.
The IMF warned this week that the eurozone crisis is one factor dragging global growth sharply down and it is calling for recapitalization of some European banks.
EU Financial Services Commissioner Michel Barnier adopted the same line on Thursday, backing a switch of attitude flagged by Competition Commissioner Joaquin Almunia on Wednesday.
“The time has ended when taxpayers had to bolster the banks,” Barnier told the Le Figaro newspaper in Paris. “But we cannot rule out that some banks will need help from the state.”
The commission was getting ready for this, he revealed, noting that under European stress tests a few months ago, nine banks failed and 16 others had scraped past “and must also be recapitalized.”
The recently created European Systematic Risk Board in Frankfurt said the banks had to be strengthened, possibly through the new European Financial Stability Fund (EFSF) designed mainly for bailing out states.
“Over the last months, sovereign stress has moved from smaller economies to some of the larger EU countries,” it said.
The IMF also suggested use of the EFSF, saying bluntly: “Some European banks urgently need to bolster their capital levels.”
The IMF estimated that the eurozone debt crisis has built up sovereign debt risk in the last two years of 300 billion euros ($405 billion) for banks in the European Union.
The rating agency S&P, having downgraded Italian state debt, then downgraded seven Italian banks and the Lloyd’s of London insurance market said it had cut its exposure to EU government debt and withdrawn money from some banks.
Moody’s cut its ratings for Bank of America, Wells Fargo and Citigroup on Wednesday because it doubted that in a crisis the U.S. government would repeat support for “systemically important” U.S. banks.
French banks have taken a battering on the stock market in the last few weeks, amid rumours that some big depositors have withdrawn funds. Last week top global central banks suddenly injected dollars into the banking system to relieve banks which had been deserted by their normal sources of dollars.
A U.S. treasury official said that the challenge for EU officials was to ensure that countries with sound budget plans could access finance and “that European banks have the requisite liquidity and are sufficiently capitalized.”
Commenting on the U.S. Fed’s stimulus, research director at GFT in New York, Kathy Lien, said: “Investors don’t believe that this will be enough to promote growth in the US economy.”
In Asia, at National Australia Bank, John Kyriakopoulos said: “Moody’s cutting the credit ratings of three U.S. banks and the Fed referring to ‘strains in global financial markets’ also weighed heavily on sentiment.”