World markets take fright at Greek threat

World stocks and the euro fell and borrowing rates for eurozone countries signalled alarm on Wednesday at new elections in Greece, prolonging agony for the eurozone.

Inconclusive talks between German leader Angela Merkel and new French President Francois Hollande were followed by insistence from the German finance minister that Greek voters should not think they can renegotiate rescue conditions.

The feeling that Greece has taken yet another step towards the unknown was reflected in remarks by the head of the International Monetary Fund and from the Greek president.

Lagarde openly referred to the possibility of Greece having to leave the eurozone, telling France 24 television late on Tuesday: "It is something that would be extremely expensive and would pose great risks but it is part of options that we must technically consider."

And Greek President Carolos Papoulias said in a transcript of a conversation with Greek central bank head George Provopoulos that Greeks were withdrawing savings from banks, at the rate of some 700 million euros ($894 million) on Monday alone.

Papoulias said the bank chief had told him that the banks' situation was very difficult and that the situation "would worsen in the next two days."

The head of the bank said that "there were a lot of fears that could turn into panic," the president said.

Merkel and Hollande underscored their intention to help Greece stay in the eurozone and said they were mulling measures to boost growth in the debt-stricken country.

But on Wednesday, German Finance Minister Wolfgang Schaeuble insisted that it was not possible to re-negotiate an international aid plan for Greece.

"This is an aid programme that was prepared down to the last detail, we cannot renegotiate it," Schaeuble told Deutschlandfunk radio.

"Those who win the elections will have to decide if they accept the conditions or not," he added.

The alarm stalking the streets of Greece, screens in dealing rooms and meetings among policymakers arises from the failure of Greek politicians to form a government and the calling of a new election in June.

Given the sudden rise of left-wing parties bent on rejecting the bailout terms, the central issue is whether Greeks will vote to reject conditions tied to a second debt rescue, or will vote in a government committed to enacting reforms.

"Events surrounding Greece and the inability to form a new coalition government continues to cause havoc, negatively affecting stock markets around the world and pushing periphery bond yields to highs not seen for several months," said ETX Capital trader Markus Huber.

In early stock market deals, London's benchmark FTSE 100 index was down 1.50 percent at 5,355.78 points, Frankfurt's DAX 30 shed 1.47 percent to 6,307.65 points and in Paris the CAC 40 slumped 1.23 percent to 3,001.84.

Madrid tumbled 2.24 percent and Milan retreated 1.69 percent in value.

In Asia, stocks in Tokyo fell by 1.12 percent, the Sydney market was 2.36 percent lower, Seoul closed 3.08 percent lower, and Hong Kong shares slumped 3.19 percent.

On Wall Street, the Dow Jones Industrial Average had closed down 63.35 points, or 0.50 percent, at 12,632.00.

The euro struck a four-month low point at $1.2681. It later pulled back to $1.2707, which compared with $1.2728 late in New York on Tuesday.

The spread, or difference in interest rates, between 10-year Spanish and German bonds hit a record high on Wednesday, underscoring fresh fears of contagion in the eurozone debt crisis.

The rate on Spanish bonds jumped to 6.495 percent, while Italian bonds approached the psychologically key six-percent mark, at 5.946 percent.

Ten-year borrowing costs of greater than six percent are widely considered to be unsustainable in the long term.

Italy and Spain are suffering "contagion" effects from the Greek debt crisis because investors wonder if the two much bigger eurozone economies will also end up in dire financial straits and need help which the eurozone and IMF would be hard-pressed to fund.

The market's reaction is to "seek shelter in safe assets, which is to say German debt," economists at BNP Paribas explained in a research note.

With the picture brighter in Germany -- which published growth data on Tuesday showing it had escaped recession in the first quarter -- the interest rate which it has to pay to borrow money for 10 years fell to the lowest level ever, to 1.434 percent from 1.469 percent on Tuesday.