Greek debt fears return

FEARS of a Greek debt default and a worldwide recession are likely to push the Australian sharemarket about 1.7 per cent lower this morning, futures traders predict.

FEARS of a Greek debt default and a worldwide recession are likely to push the Australian sharemarket about 1.7 per cent lower this morning, futures traders predict.

Treasurer Wayne Swan yesterday played down the risks global turmoil posed for Australia, saying the local economy had outperformed Europe and the US in a "reality check for the doomsayers that have been talking our economy down in recent times".

But Mr Swan said Australia's mining boom had created a "patchwork economy", putting pressure on manufacturing, tourism and retail.

Financial markets have been shaken by concern Greece may default on its debt as early as this week, with sharemarkets around the world sliding late last week as investors sought havens.

The fears have been fuelled by talk the German government may block the release of an ?8 billion ($A10.4 billion) aid instalment to Greece unless it is convinced Athens has kept an unpopular promise to slash spending and increase taxes. Without the German euros, Greece would default on its bonds.

In a note to clients, investment bank UBS said that in the event of a global downturn Australia's booming minerals sector meant it should be able to avoid following the rest of the world into recession, although growth would slump and unemployment rise.

But UBS economist Scott Haslem had no good news for the stricken retail sector, saying consumer reluctance to borrow and spend was consistent with households moving to cut debt and "could persist for a number of years".

Meeting in Marseille, France, Group of Seven finance ministers and central bankers representing the world's biggest economies promised to "take all necessary actions to ensure the resilience of banking systems and financial markets", but detailed no new policies.

"Concerns over the pace and future of the recovery underscore the need for a concerted effort at a global level in support of strong, sustainable and balanced growth," they said in a statement. Renewed fears that European policymakers were failing to prevent a Greek default and contain their debt woes last week prompted investors to sell stocks and push the euro to a six-month low against the US dollar.

European bank and sovereign credit risk reached all-time highs as 10-year Treasury and German bund yields fell to record lows on demand for a haven.

Germany moved towards insulating its banks against the fallout of a possible Greek default and Juergen Stark's resignation from the European Central Bank exposed the policy rifts aggravating the debt turmoil. Such shifts highlight the biggest risk to international expansion since the collapse of Lehman Brothers sparked the global financial crisis three years ago.

The sense of disarray drew fire from G7 officials with US Treasury Secretary Timothy Geithner lobbying his European counterparts to get their act together. Canadian Finance Minister Jim Flaherty even suggested Greece might need to quit the euro.

European authorities "need to do whatever they can do to calm these pressures," Mr Geithner said. "They have to demonstrate they have enough political will."

Europe is not the only threat to the world economy, with US unemployment above 9 per cent and Japan struggling with the effects of a strong yen.

Dogged by voter unrest and ideological splits, Europe's leaders have reignited investor unease less than two months since the leaders outlined their latest remedy for a crisis nearing its second anniversary. Finland is demanding collateral from Greece in return for fresh aid and German legislators want veto power.

Central banks will "maintain price stability and continue to support economic recovery" and provide liquidity "as required" to lenders, while governments will pursue "growth-friendly" budget cuts, they said in their statement. German Chancellor Angela Merkel's government is preparing plans to shore up its nation's financial sector.

The measures involved aiding lenders and insurers that faced a possible 50 per cent loss on their Greek bonds if the next tranche of Greece's bailout was withheld, said three coalition officials, who spoke on condition of anonymity because the deliberations are private.

The Dow Jones Industrial Average slid more than 300 points on Friday.

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