May 6, 2010 / 4:39 AM / 10 years ago

TOPWRAP 8-Greece backs austerity plan but euro, US stocks fall

* Euro and U.S. stocks tumble as investors flee risk

* Merkel vows politicians will win battle with markets

* U.S. Fed concerned about fallout

* Trichet says ECB did not discuss buying bonds

* Says Greece “will not default”

(Adds comment on Wall Street drop)

By George Georgiopoulos and Angela Moon

ATHENS/NEW YORK, May 6 (Reuters) - The Greek parliament backed an austerity plan on Thursday despite violent unrest, as European Central Bank inaction on the nation’s debt crisis helped to trigger major falls in the euro and weakness on Wall Street.

Shock waves from the relatively small Greek economy spread beyond Europe to rock markets in the United States, Latin America and Asia, as some investors panicked about the chance that one or more government might default on their debt.

German Chancellor Angela Merkel declared that governments were locked in a battle with financial markets, a confrontation she and her fellow politicians were determined to win.

Federal Reserve officials expressed concern about potential consequences for the U.S. economy and the White House said President Barack Obama was close watching developments.

The euro tumbled almost two percent on the day to below $1.26 before recovering partly. “This is a full capitulation sell-off we’ve seen in the last couple of hours,” said Brian Dolan, chief currency strategist, at Forex.com in New Jersey.

“The sovereign credit worries in Europe started the ball rolling and now it’s a complete panic.” [nN06145673]

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Graphic on euro's performance r.reuters.com/vyh72k

Euro zone crisis in graphics r.reuters.com/fyw72j

Comparison of maturity profiles r.reuters.com/buv62k

Bank exposure Greece/Portugal r.reuters.com/mun79j

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Wall Street was even more volatile. U.S. stocks lost about three percent but at one point the Nasdaq index was down more than 9 percent and the S&P 500 and Dow briefly wiped out all this year’s gains. [nN06208810]

CNBC television reported that a trading error at a major firm was to blame for the plunge. Separately, the Nasdaq exchange said it was working with other major markets to review mid-afternoon trading activity. [nN06246590]

Chancellor Merkel drew up the battlelines with market speculation. “To some degree this is a battle between the politicians and the markets,” she said in a speech in Berlin. “But I am firmly resolved — and I think all of my colleagues are too — to win this battle.” [nLDE6452IP]

European markets have been nervous for weeks, but Thursday’s slide accelerated after ECB President Jean-Claude Trichet failed to offer any new measures to ease Greece’s debt crisis.

“Nothing short of a sensational announcement can help the euro at this point. And that certainly did not come from Trichet,” said Kathy Lien, a director for currency research at GFT Forex, in New York. [nN06264384]

In Athens, parliament approved the government’s 30 billion euro ($40 billion) austerity bill, imposing years of hard measures in return for a 110 billion euro rescue by the European Union and International Monetary Fund agreed last Sunday.

“This is the time for change. There is not a single day or hour to lose,” Socialist Prime Minister George Papandreou said. But he had to expel three Socialist deputies who abstained in a preliminary vote rather than backing their government.

DEFECTIONS

The defections were a first sign of the problems Papandreou faces within his own party in applying the harsh measures needed to pull Greece out of a crisis shaking international markets.

As the vote took place, a crowd of around 10,000 protesting students, workers and pensioners converged on parliament to voice their opposition to the bill, chanting “Take to the streets! Say ‘No’ to the measures that hurt the Greek people!”

Riot police fired teargas to disperse about 150 protesters who hurled bottles and stones.

On Wednesday, in the biggest and most violent protest since riots shook the country in 2008, some 50,000 Greeks marched in Athens and clashed with police in pitched street battles. A petrol bomb attack killed three workers in a local bank branch.

Germany will bear the brunt of the bailout and the country’s parliament will tackle the issue on Friday. [nLDE6452AZ]

The Bundestag lower house is due to start debating a draft law on the German contribution at 0700 GMT. The debate is due to last two hours, after which lawmakers will vote.

The upper house is scheduled to vote on the bill soon afterwards. Both houses are expected to give their approval.

ECB chief Trichet proved a big disappointment when he said a meeting of the bank’s Governing Council in Lisbon had not discussed buying bonds to combat the crisis.

DEFAULT “OUT OF THE QUESTION”

Trichet reiterated the ECB’s backing for Greece’s savings plans and dismissed the prospect of any euro zone member defaulting on debt. “Default is, for me, out of the question,” he said. [nLDE6450H7]

But fears that Greece and possibly other governments could indeed default on their debt swept the globe. The Brazilian real currency BRBY fell almost four percent and Mexico’s peso sank past the key psychological level of 13 per dollar.

Conglomerate Swire Pacific scrapped a 2.7 billion Hong Kong dollar share flotation by its property unit on Thursday, the biggest Asian casualty so far of the damage to capital markets wrought by Greece’s economic crisis. [nSGE6450IT]

Policymakers’ attempts to talk down the risk of contagion and scare off “speculators” had little impact on traders unimpressed by the slow EU response to the crisis.

Yield spreads widened for weaker euro zone countries at risk of being sucked into the debt crisis as investors headed for the greater safety of German government debt. Portuguese, Spanish and even Italian bonds were affected. [nLDE6451SD]

In a globalised economy, problems spread fast and the euro zone’s troubles provoked worries far afield.

U.S. central bankers said the Federal Reserve was closely monitoring the financial turbulence in Europe as it could have repercussions for the United States and its markets.

James Bullard, president of the St. Louis Fed, argued the crisis posed a threat to an otherwise improving U.S. economy. “One risk to the outlook ... is the fallout from potential sovereign debt default as conditions continue to deteriorate in Greece and other countries,” he said. [nN06158181]

The Obama administration is keeping a close eye on the debt crisis in Greece and its global impact. “The president has heard regularly from his economic team,” White House spokesman Robert Gibbs said. [nWEN4375]

CONFLAGRATION

German Finance Minister Wolfgang Schaeuble said any restructuring of Greek debt would cause “exactly the kind of conflagration that we could no longer control”.

“We are in a really fundamental crisis, the stability of the euro is really at stake,” he added.

European Council President Herman van Rompuy, who will chair a euro zone summit on the crisis on Friday, was the latest top EU official to try to erect a verbal firewall, saying the situation of Portugal or Spain had nothing to do with Greece.

“What I now see are totally irrational movements on the markets set off by unsubstantiated rumours, for instance yesterday with Spain, but also as regards Portugal,” he said.

- For more on the euro zone crisis click on [ID:nLDE6351JT]

Additional reporting by Noah Barkin in Athens, Gernot Heller in Berlin, Tim Heritage in Brussels, George Matlock in London, Pedro Nicolaci da Costa in Richmond, Virginia; writing by Paul Taylor/Andrew Roche/David Stamp; editing by Peter Millership

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