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G7 finance ministers call Greece to control its budget

08 February 2010 09:40 (UTC +04:00)

Baku â€“ APA-Economics. Investors are skeptical of assurances European finance ministers gave to their Group of Seven counterparts this weekend that the euro zone’s debt crisis is under control, Reuters reported.

The 16-country currency bloc is facing its biggest ever test after concerns about Greece’s huge public debt and deficits spread to several other euro zone countries, pushing the euro to a near nine-month low against the dollar.

A sell-off of Greek, Portuguese and Spanish debt last week, which hurt global stock markets, pushed Greece’s debt woes onto the agenda of the meeting of Group of Seven rich nations’ finance ministers and central bankers in Canada’s remote north.

European ministers told their G7 peers on Saturday they would make sure Greece sticks to its budget-cutting plan.

But analysts said Europe needs to go beyond words to restore confidence among investors worried about costly financial help for Greece to prevent a default that would upset the recovery in financial markets from the 2008 credit crisis.

The cost of insuring the sovereign debt of Greece, Portugal and Spain against default hit record highs on Friday and investors demanded higher yields to buy bonds of other euro zone states.

The idea of a Greek bailout by the International Monetary Fund was quashed at the G7 meeting by Jean-Claude Juncker, chairman the euro zone finance ministers’ group.

Some investors saw that as a sign that Europe might be preparing financial support for Greece although European leaders would have to settle differences about setting a precedent for bailing out members of the euro zone.

Under European Union law, member states cannot assume debt of other members. The EU’s options include: faster disbursement of regular aid to Greece; issuing debt backed by the full euro zone to give Greece a share of the proceeds; and the purchase by EU governments or by the European Investment Bank of Greek debt on the markets.

Greece this week can show investors it can tighten its belt when the government announces plans to raise taxes and control public wages -- key details of its promised austerity drive.

In a challenge to the Socialist government, the country’s civil servants will stage a 24-hour strike on Wednesday. The country’s finance minister said Athens would stand firm.

Concerns about budget deficits are not limited to the euro zone with the United States now set to run up a budget deficit of 10.6 percent of gross domestic product this year after spending heavily in an effort to rescue its economy.

Canadian Finance Minister Jim Flaherty, after hosting the G7 meeting, said governments were starting to look at scaling back their support and returning to fiscal health.

But the global economy was not recovering fast enough for governments to withdraw stimulus measures now, he added.

Credit ratings agency Moody’s Investors Service last week said the United States must do more to restore its fiscal health to preserve its AAA credit rating.