The euro and European shares fell on Monday as fears grew that Greece would not accept the painful terms of a new bailout deal needed to avoid a potential sovereign debt default, taking the shine off a brighter global economic outlook.
The three coalition parties in the Greek government are under pressure to tell the European Union if they agree to wage cuts and other reforms proposed in return for a 130 billion euro rescue deal necessary before debt repayments fall due in March. A Greek government official who declined to be named denied however that the three parties had to respond by noon (1000 GMT) on Monday as stated on Saturday by the spokesman for one of them, the PASOK socialist party. The unnamed official said the Greek side had to agree terms with its international lenders before euro zone finance ministers next meet.
"Deadline or no deadline, I am not surprised," said Jeremy Stretch, head of currency strategy at CIBC World Markets, who expected these deadlines to be flexible. "Already the euro has moved a fair bit lower this morning and a lack of movement on the Greek deal will perhaps see it grinding below $1.30."
The slow progress to sort out the Greek mess has angered the country's European partners and undermined investor confidence across all markets. European bank shares have been hit by fears over their exposure to a debt default, while safe-haven German government bond prices moved higher and gold saw some support. "There's a lot of talk about the deadline today, but it's not a deadline for the deal, it's just for the politicians to give a nod, this is going to run and run," said ING rate strategist Padhraic Garvey.
The single currency fell 0.8 percent to stand at $1.3036, having dropped as low as $1.3052 in early trade at $1.3023 after hitting a six-week high last week of $1.3235. "The euro zone remains a major uncertainty. It has the potential to unravel everything in the event of a disorderly default in Greece," said Jeremy Batstone-Carr, strategist at Charles Stanley.
The FTSEurofirst 300 index of top European shares was down 0.7 percent at 1,069.68 points, after hitting a six-month high on Friday, following data showing many more jobs being created in the United States than expected, boosting optimism about the recovery in the world's biggest economy. Banks led the market lower with the STOXX Europe 600 euro zone Banking index down 2 percent after French banks BNP Paribas, Credit Agricole and Societe Generale saw falls of between 2.7 and 4.5 percent. "Despite the expectation-busting (U.S.) non-farm payrolls on Friday, the optimism has faded quickly as the storm clouds surrounding Greece continue to gather," Jonathan Sudaria, trader at Capital Spreads, said.
A global private sector index produced by JP Morgan and also released on Friday hit an 11-month high, boosted by positive numbers on service sector growth from China and the euro zone as well as the United States.
GREEK IMPACT WIDESPREAD
Safe-haven German government bond yields fell as the doubts over the Greek deal undermined the growing confidence that actions by the European Central bank had eased pressure in the sovereign debt market. German Bund futures eased off session highs but were 41 ticks higher at 138.73, while 10-year yields fell about 4 basis points to 1.89 percent.
The U.S. dollar, which had seen good gains in the wake of the jobs report, extended its gains against the yen to 76.70, having rallied to 76.809 yen at one point, its highest in over a week.
Against a basket of major currencies the greenback was up 0.6 percent at 79.40. Worries of the state of play with Greece also saw Brent crude oil prices slip under $114 a barrel as a messy default could have an impact on demand across the euro zone, although renewed tensions with Iran kept a floor under prices.
"There's still not much confidence over the euro zone economies, and that is limiting upside from strong U.S. data and the tensions in Iran," said Ken Hasegawa, a commodity derivatives manager with Newedge Brokerage in Tokyo.