G7 talk on Greece will not soothe global investors

Canada's Finance Minister Jim Flaherty (L) speaks during a news conference with U.S. Treasury Secretary Tim Geithner (2nd L), Britain's Chancellor of the Exchequer Alistair Darling (2nd R) and Japan's Finance Minister Naoto Kan during the G7 finance ministers' meeting in Iqaluit, Nunavut February 6, 2010.

TORONTO (Reuters) - Investors are skeptical of assurances European finance ministers gave to their Group of Seven counterparts this weekend that the euro zone's debt crisis is under control.

The 16-country currency bloc is facing its biggest ever test after concerns about Greece's huge public debt and deficits spread to several other euro zone countries, pushing the euro to a near nine-month low against the dollar.

A sell-off of Greek, Portuguese and Spanish debt last week, which hurt global stock markets, pushed Greece's debt woes onto the agenda of the meeting of Group of Seven rich nations' finance ministers and central bankers in Canada's remote north.

European ministers told their G7 peers on Saturday they would make sure Greece sticks to its budget-cutting plan.

European Central Bank President Jean-Claude Trichet issued a statement to express confidence in that plan while U.S. Treasury Secretary Timothy Geithner said the Europeans "made clear to us they will manage this with great care."

But analysts said Europe needs to go beyond words to restore confidence among investors worried about costly financial help for Greece to prevent a default that would upset the recovery in financial markets from the 2008 credit crisis.

"What I think is needed is an agreement on behalf of the EU to provide further support for Greece to further ensure that it doesn't default," said Michael Woolfolk, senior currency analyst at Bank of New York Mellon.

The cost of insuring the sovereign debt of Greece, Portugal and Spain against default hit record highs on Friday and investors demanded higher yields to buy bonds of other euro zone states.

The idea of a Greek bailout by the International Monetary Fund was quashed at the G7 meeting by Jean-Claude Juncker, chairman the euro zone finance ministers' group.

Some investors saw that as a sign that Europe might be preparing financial support for Greece although European leaders would have to settle differences about setting a precedent for bailing out members of the euro zone.

"The problem in Europe is that there is not a single Treasury secretary that will coordinate that," said Axel Merk, president of Merk Investments in Palo Alto, California.

Analysts at investment bank UBS said before the G7 meeting that an IMF rescue of Greece would be the best solution. "An EU bailout that is half-hearted in its fiscal assistance would damage the euro zone's credibility even further," they said.

Under European Union law, member states cannot assume debt of other members. The EU's options include: faster disbursement of regular aid to Greece; issuing debt backed by the full euro zone to give Greece a share of the proceeds; and the purchase by EU governments or by the European Investment Bank of Greek debt on the markets.

TESTING WEEK FOR GREECE

Greece this week can show investors it can tighten its belt when the government announces plans to raise taxes and control public wages -- key details of its promised austerity drive.

In a challenge to the Socialist government, the country's civil servants will stage a 24-hour strike on Wednesday. The country's finance minister said Athens would stand firm.

Concerns about budget deficits are not limited to the euro zone with the United States now set to run up a budget deficit of 10.6 percent of gross domestic product this year after spending heavily in an effort to rescue its economy.

Canadian Finance Minister Jim Flaherty, after hosting the G7 meeting, said governments were starting to look at scaling back their support and returning to fiscal health.

But the global economy was not recovering fast enough for governments to withdraw stimulus measures now, he added.

Credit ratings agency Moody's Investors Service last week said the United States must do more to restore its fiscal health to preserve its AAA credit rating.

U.S. Treasury chief Geithner on Sunday dismissed concerns that the United States might eventually lose its top-notch rating.

"Absolutely not ... That will never happen to this country," he told ABC News in a television interview.

G7 ministers also said they backed the notion of a global tax on banks to help pay for financial bailouts, an idea first floated last year which seems to be gaining momentum as the Obama administration takes a tougher line on Wall Street.

Boris Schlossberg, director of foreign exchange research at GFT in New York, said the bank tax idea could be another cause for concern for investors on top of the euro zone's problems.

"So the net result of all this is not a boost of confidence in the capital market," he said. "We may see a little more turbulence going forward. Overall, the G7 meeting, instead of reassuring the market may have simply created more angst.".