Euro zone warned of contagion

European policymakers warned of the risk of "contagion" spreading the euro zone debt crisis beyond Greece, as unrest in Athens claimed its first lives and investors fled to the safe haven of the dollar.

Three people burned to death when protesters set a central Athens bank ablaze on Wednesday during a demonstration against austerity measures that are the price of the 110 billion euro ($146.5 billion) EU/IMF bailout agreed on Sunday.

Public and private sector workers shut down airports, tourist sites and public services in a general strike and tens of thousands of demonstrators marched against the planned cuts to wages and pensions and tax increases.

A giant plume of dark grey smoke rose over central Stadiou Avenue where a two-storey building housing a branch of Marfin bank was burning. Hundreds of protesters threw rocks and bottles at police who responded with tear gas.

German Chancellor Angela Merkel told parliament in Berlin Europe's fate was at stake in the most serious crisis of the single currency's 11-year lifetime, and other euro countries could be hit unless the rescue for Greece succeeds.

European Monetary Affairs Commissioner Olli Rehn said it was vital to stop the crisis spreading beyond Greece.

"It's absolutely essential to contain the bushfire in Greece so that it will not become a forest fire and a threat to financial stability for the European Union and its economy as a whole," he told a news conference.

Anxiety over a widening of the crisis sent stocks tumbling worldwide, and the euro hit a new one-year low.

Battered Greek bank shares shed a further 5 percent on news of the fire deaths -- the first casualties in three months of sporadic strikes and street protests.

Shares in Spain and Portugal, seen as the next two targets for investors testing the European Union's will and ability to defend weak euro zone economies, fell for a second straight day. Lisbon had to pay more than four times its previous yield to sell six-month treasury bills at auction on Wednesday.

Merkel, whose foot-dragging many analysts have blamed for aggravating the Greek crisis, told parliament the success of the rescue package would determine "nothing less than the future of Europe -- and with it the future of Germany in Europe."

Without the aid, a chain reaction threatened to destabilize the European and international financial system, she said in a debate on approving Berlin's 22 billion-euro contribution to the emergency loans for Athens despite German public hostility.

European Central Bank governing council heavyweight Axel Weber gave a similar warning in a statement to German lawmakers, saying that a Greek default would pose a substantial risk to the stability of European monetary union and the financial system.

"There is a threat of serious contagion effects for other euro zone countries and increasing negative feedback effects for capital markets," he said.


The head of the International Monetary Fund acknowledged the risk of the debt crisis spreading from Greece to other European countries but said he saw no real threat to the big euro zone states such as France and Germany.

"There is always a risk of contagion," Dominique Strauss-Kahn told French daily Le Parisien.

"Portugal has been mentioned, but it is already taking measures and the other countries are in a much more solid situation ... but we should remain vigilant."

He criticized the 15 other euro zone governments for charging Greece a 5 percent interest rate on the loans, largely at Germany's insistence, saying they should have lent at the same rate as the IMF, more than half a point less.

The euro fell to a one-year low of $1.2936 while the cost of insuring Spanish and Portuguese debt against default rose further.

Seeking to calm markets, Rehn said Spain did not need an aid mechanism of the kind created for Greece and he was not going to propose one. But he also said the deficit levels of all EU states were "worryingly high."

Despite official denials, many economists are convinced Greece will have to restructure its debt, making private investors take a share of the pain.

"What we are seeing today is very classical financial contagion effect," said Sebastian Barbe, head of emerging markets strategy at Credit Agricole, Hong Kong.

"This is because the market is still pricing in some more sovereign crisis problems out of Europe, and for the short term it can continue for some more time."

Greek Austerity

Concern that Greece's Socialist government will be unable to implement all the deficit-cutting measures agreed with the EU and IMF because of potential social unrest is one of the drivers of the euro zone turmoil.

Prime Minister George Papandreou presented an austerity bill to parliament on Tuesday which foresees 30 billion euros in new savings through deep cuts in wages and pensions and a hike in sales tax. But the conservative opposition vowed to vote against it, dooming hopes of a political consensus.

Analysts were watching Wednesday's protest for pointers to the degree of mobilization of Greece's powerful trade unions.

So far, demonstrations have been limited to tens of thousands but anger is mounting, with opinion polls showing ordinary Greeks believe they are paying the price of the crisis while tax evasion and corruption go unpunished.

"With our strike today we are continuing our fight against harsh and unfair measures that hit workers, pensioners and the unemployed," Yannios Panagopoulos, president of private sector union GSEE, told Reuters.

[Source: By Renee Maltezou and Dave Graham, Reuters, Athens and Berlin, 05May10]

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