Debt fears keep markets gloomy

Persistent fears over the eurozone debt crisis ensured a gloomy start to the new quarter for embattled world markets today.

Greece's admission that it will miss its deficit targets and alarm bells over the health of Belgian bank Dexia spooked investors and saw further losses on markets on both sides of the Atlantic.

The FTSE 100 Index was 1% lower, while France's Cac-40 and the Dax in Germany were more than 2% down. Wall Street's Dow Jones Industrial Average was also lower as the London market closed.

The weak performance in London follows the FTSE 100's worst quarter in nine years, which saw around 14% wiped off its value in the three months to the end of September.

The Greek government's admission that it will miss its tough deficit reduction targets cast fresh doubts on whether it will be allowed the next tranche of its 110 billion euro (£94.4 billion) bailout.

The debt-stricken country has previously warned that, if it does not receive the money, it could go bankrupt within weeks, which would cause financial chaos.

Meanwhile, reports that Dexia is in need of a government bailout added to fears about the health of the banking sector.

As the cost of insuring bank debts across the world rose to levels not seen since the financial crisis, there is now speculation of another credit crunch as confidence in lending dries up.

The development hit the banking sector, with Standard Chartered, Royal Bank of Scotland and Lloyds Banking Group all down more than 4%.

Traders are worried that political leaders do not seem to be able to tackle the problems of high debt and slowing economic growth in many western nations, which have plagued markets for months.

Cameron Peacock, market analyst at IG Markets, said no one has an answer to the problems, and as a result the markets continue to be "in a state of limbo".

He added: "Despite best intentions, politicians and central bankers have been unable to come up with any meaningful solutions and this has in turn eroded the market's confidence that there's any light at the end of the tunnel.

"Talk and speculation of what might happen has yet to translate into decisive action and, until it does, markets are sure to bounce around on high volatility, which in itself will act as a deterrent for retail investors in particular wading into the market."

Meanwhile, Standard and Poor's decision to affirm the UK's AAA credit rating and stable outlook had little impact on the market.

The move - a boost to Chancellor George Osborne - was accompanied with a downbeat assessment of the UK's "lacklustre" recovery.

S&P said low labour productivity, poor vocational education and insufficient investment in infrastructure would also hinder the rebalancing of the economy.