European debt woes stalk markets

June 20, 2011 - 5:56 AM

LONDON (AP) — Worries over Europe's debt crisis kept markets on edge Monday, following a warning over Italy's credit rating and a failure by eurozone finance ministers to agree an immediate release of bailout funds to Greece.

Though the finance ministers of the 17 countries that use the euro agreed to hand over the next bailout installment, worth euro12 billion ($17 billion), they said they would only do that if the Greek Parliament backed further austerity measures.

With the Greek government facing a confidence vote in Parliament on Tuesday, there's still an element of political risk and that's clearly weighing on markets at the start of a week that's likely to be dominated again by the country's woes. Though Prime Minister George Papandreou's newly-reshuffled government is expected to prevail in the confidence vote, there's still uncertainty over the passage of another euro28 billion in austerity measures.

"Until markets see some solid plans put in place to deal with Greece, the markets are only going to be heading in one direction," said Simon Furlong, a sales trader at Spreadex.

In Europe, the FTSE 100 index of leading British shares was down 0.7 percent at 5,676 while Germany's DAX fell 1 percent to 7,093. The CAC-40 in France was 1.1 percent lower at 3,783.

The biggest faller of Europe's main stock markets was Italy's FTSE MIB index, which was trading 2.5 percent lower at 19,597, after Moody's warned Friday that it may downgrade its Aa2 rating on the country.

U.S. markets were also set to shed all the gains posted on Friday, when Germany appeared to back a plan to bailout Greece for a second time. Dow futures were down 0.4 percent at 11,886 while the broader Standard & Poor's 500 futures fell a similar rate to 1,261.

The euro was 0.3 percent lower at $1.4234, having enjoyed a rally Friday after German Chancellor Angela Merkel indicated that private creditors, such as banks, would not be compelled to share any pain in a second bailout of Greece. Instead, she backed the line touted by the French government and the European Central Bank that any private sector involvement has to be on a "voluntary" basis.

"The whole concept of voluntary participation of private investors in roll-overs of debt does not appear to have been resolved leaving the financial markets skeptical of the plan that includes true voluntary participation," said Derek Halpenny, European head of global currency research at The Bank of Tokyo-Mitsubishi UFJ.

As the week progresses, attention will shift to the U.S. and the Federal Reserve's rate-setting meeting. As well as keeping its benchmark rate unchanged at near zero percent, the Fed is expected to confirm that its current monetary stimulus will end as expected at the end of this month.

Earlier in Asia, Japan's Nikkei 225 was one of the few benchmarks posting gains for the day. The benchmark gained less than 0.1 percent close at 9,354.32 despite data showing the country's exports dropped for the third straight month in May due to massive production losses following the March 11 earthquake.

South Korea's Kospi sank 0.6 percent to 2,019.65, while Hong Kong's Hang Seng shed 0.4 percent to 21,599.51

Mainland Chinese shares extended losses for a fourth straight trading session amid a lack of funds as banks complied with the central government's latest order to raise the level of deposits they must hold as reserves.

The Shanghai Composite Index lost 0.8 percent to 2,621.25, its lowest close this year, while the Shenzhen Composite Index lost 1.1 percent to 1,073.19.

In the oil markets, worries over the global economy pushed prices lower again. Benchmark oil for July delivery was down $1.24 to $91.77 a barrel in electronic trading on the New York Mercantile Exchange.

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Pamela Sampson in Bangkok contributed to this report.