Stock markets across the world plunged yesterday as European finance ministers announced they would delay a decision on releasing €8 billion (£7bn) in emergency payments to Greece until November.
The Eurogroup also announced its intention to impose greater haircuts on the holders of Greek sovereign bonds, reopening a deal agreed in July that would see banks accept a 21 per cent write-down on the value of their holdings of Greek debt.
"We have to take into account the fact that we have experienced changes since the decisions we took on 21 July," the Eurogroup chairman, Jean-Claude Juncker, said.
The Finnish government also confirmed that it will receive collateral from Greece in return for contributing to the second €109bn EU/IMF bailout of the country. Helsinki, however, will have to pay a high price for the special concession, in the form of lower interest rates on loans extended.
Investors sold shares heavily across Europe and America yesterday in response to the news from Luxembourg. The German Dax index closed down 2.98 per cent. France's Cac fell 2.61 per cent. The American S&P 500 officially entered a bear market in afternoon trading yesterday when it fell 20 per cent from its peak earlier in the year. The FTSE 100 closed at 4944.44, down 2.6 per cent. Despite previously claiming that Greece would run out of money by the middle of this month, the Greek Finance Minister, Evangelos Venizelos, said yesterday that Athens can hold out until November. But the longer it takes for these funds to be released, the more nervous markets will grow about a possible uncontrolled Greek default.
Some investors have been comforted in recent weeks by reports that the eurozone leaders are preparing a plan to leverage the €440bn European Financial Stability Facility (EFSF), which it is felt would spell a decisive intention to stand behind all members of the single currency.
But comments from the Austrian and German finance ministers yesterday cast fresh doubt on whether such a plan would be approved. The outgoing head of the European Central Bank, Jean-Claude Trichet, also expressed his opposition to suggestions that a leveraged EFSF could be backed by the ECB. He told the European Parliament: "I'm not in favour of bailout funds financed by the ECB."
Mr Trichet was making his final address to the European Parliament before he steps down at the end of the month. He will be replaced by the head of the Italian central bank, Mario Draghi.
As well as rejecting an enhanced bailout role for the ECB, Mr Trichet used the occasion to insist that the euro remains a stable currency. He pledged that, when he steps down, "the ECB will continue to guard our currency, the euro, and deliver price stability to Europe's citizens".
Mr Juncker told a press conference yesterday that the terms of Finland's collateral deal were so unattractive that no other eurozone country pushed to follow Helsinki. He said: "When I was asking if another country would like to join the deal, the answer was clearly 'no'."Reuse content