Euro debt fears spread around the world

(BRUSSELS) - European ministers headed into critical talks on Friday on curbing huge budget deficits which are destabilising global markets amid new doubts about the foundations of the euro currency.

While stock markets in the United States and Asia suffered heavy new falls, German lawmakers were to approve a nearly trillion-dollar EU-IMF package for indebted eurozone countries, amid tensions with France over management of the crisis.

The EU crisis is shaking financial markets around the globe despite approval by the US Senate on Thursday of landmark financial sector reforms.

The depth of the crisis and the concern it is generating were spotlighted by the head of the International Monetary Fund Dominique Strauss-Kahn.

"I do not believe that the eurozone is at risk of breaking up," he said in remarks to French television late on Thursday.

"The whole world is watching this ... and is losing confidence in Europe," he said.

But French President Nicolas Sarkozy hurried to deny there was an EU split, saying that he backed a call by German Chancellor Angela Merkel for tough action against EU members which breached budget rules.

"We have no disagreements together," he said.

The main purpose of the EU finance ministers meeting is to discuss highly controversial proposals promoted mainly by Germany for cross border oversight by EU authorities of how the 27 members manage their public finances.

Germany has demanded draconian reforms to tighten up discipline and respect for the discredited eurozone Stability and Growth Pact.

France takes a similar line, and on Thursday Sarkozy said he intended to freeze public spending for three years and wanted a curb written into the constitution.

Greece and Spain have announced new spending cuts, which provoked demonstrations on Thursday. Portugal has also announced new measures. Italy is expected to do so soon.

The pact was intended to contain public deficits and to ensure that in times of growth countries moved into surplus.

But it was widely breached even before the global economic crisis and massive stimulus spending by governments pushed deficits in some countries to several times the ceiling of 3.0 percent of annual gross domestic product. In Greece it rose to 13.6 percent.

Chronic debt in Greece exploded into a national crisis last year, causing the European Union, belatedly, by stages and with acrimony, to come up with huge rescue packages supported by the IMF, the latest being the massive safety net of 750 billion euros 13 days ago.

Financial markets gave this an initial and brief favourable response, but have since backed away.

At CityIndex in London, market strategist Joshua Raymond echoed the view of many analysts of Thursday's trading: "Investors fretted about the euro zone situation and the divisions within Europe after Germany's decision to ban naked short selling."

That decision, he commented "is an indication that there are strong divisions in the euro zone at a time when the market is crying out for some form of unity and strength. The fear is that without unity, debt problems could become contagious across borders."

In a sign of the global repercussions, US Treasury Secretary Timothy Geithner is to visit Europe next week for crisis talks.

"Secretary Geithner will meet with European officials to discuss the economic situation in the region and the measures being taken to restore global confidence and financial stability and to promote continued recovery, a Treasury statement said.

The euro rallied slightly in early trading on Friday, but stocks in Europe remained weak after a fall of 3.6 percent on Wall Street and big falls in Asia.

The twists and turns of the crisis have also destabilised interest rate markets.

Amid rising risk aversion, money has moved towards government bonds considered to be less at risk, such as US treasuries, British, German and French bonds even though the governments of most of these countries also face massive debt problems.

Fading confidence in the eurozone and a rise in US unemployment combined to hit US and Asian stocks, and this pushed the yen up sharply, in turn provoking the Bank of Japan to inject 1.1 trillion yen (11.1 billion dollars).

The fallout was also felt in Australia where the local dollar fell further, marking a drop of 12 percent in a month.

Deputy Prime Minister Julia Gillard blamed the debt crisis in Greece, uncertainty from Europe and the United States and the recent sharp fall of the euro.