European stocks sluggish over Greece fears

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By SARAH DiLORENZO, Associated Press

PARIS (AP) — European markets pulled back from earlier gains Wednesday and the euro fell as concerns grew that Greece's creditors aren't ready to hand over bailout loans needed to avert a default and that the money might not be sufficient anyway.

In earlier trading, markets rode news that China was still willing to invest in Europe and that Greece would fulfill all the obligations imposed by its international creditors. Those include making up a euro325 million ($425 million) funding gap and presenting written guarantees that the governing coalition's party leaders would carry out the plan if they come to power. That seemed to indicate that when European leaders hold a conference call in the evening, they would green light a euro130 billion ($170 billion) bailout, Greece's second.

But impatience with Greece, which has often missed deficit targets and been slow to respond to European demands, has been growing. And by Wednesday afternoon, a European official warned Greece's assurances might not be enough. He spoke on condition of anonymity, citing policy.

There are concerns that after the elections, expected in April, Greek politicians might renege on promises made to their European colleagues. Greek leaders are in a tight spot, caught between a population enraged by painful budget cuts and international creditors who are demanding austerity in return for helping to stave off a potentially catastrophic default.

For weeks, many analysts have wondered if the bailout loans would be enough given the size of Greece's debts. Now, there is speculation they may not come in time anyway. Greece has a chunk of loans coming due in March.

Allowing Greece to default is a gamble, and earlier in the day investors seemed confident that European officials wouldn't dare risk it.

While Louise Cooper of BGC Capital said banks that hold Greek debt and governments are more prepared for a default than a few months ago, it is still risky. "We cannot know the impact of a Greek default until it happens," she said.

But the mood turned more sour later in the day.

The euro erased its early gains, dropping 0.1 percent to $1.3145.

In France, the CAC-40 was up just 0.4 percent at 3,389; Germany's DAX rose the same rate to 6,758. The FTSE index of leading British shares fell 0.1 percent to 5,895.

On Wall Street, markets struggled to get off the ground. The Dow Jones industrial average was down 0.3 percent at 12,839, while the broader S&P 500 was even at 1,351.

While many economists have advocated for a so-called orderly default, essentially allowing Greece to renege on all or most of its debts, others warn that would set a bad precedent.

"The ramifications from this are potentially catastrophic," said David White, a trader for Spreadex. "Why would any member state act on Eurozone ministers' demands when it's been proven doubtful that what is promised in return might not be 100 percent deliverable?"

Greece's European partners, meanwhile, are struggling with poor growth. On Wednesday, Eurostat figures showed that the economy for the 17 countries that use the euro contracted 0.3 percent in the final three months of 2011, a clear sign that Europe's debt crisis has spared no country.

The decline followed a meager 0.1 percent increase in the previous three-month period and could signal the area is heading into recession, defined as two consecutive quarters of negative growth.

Slow growth has been one of the most damaging effects of Europe's debt crisis, which forced many countries to savagely slash their budgets to reassure investors they would be able to pay off debts borrowed in boom times. But some observers have noted that cutting costs only exacerbates slow growth, which, in turn, exaggerates deficits.

To dig out of the vicious cycle, many have hoped for a rescue from the outside, particularly from China, which has vast foreign currency reserves. Chinese officials have been cautious to say they want to help Europe — their biggest export market — but that they have to make investments that are good for the Chinese. They have given no sign they would do more than continue to invest in the safest European government bonds.

China's central bank governor, Zhou Xiaochuan, reiterated those ideas early Wednesday, but they boosted spirits in Europe, nonetheless, underscoring how eagerly investors are hoping for a miracle.

Earlier, Asian shares rode news that Japan's central bank would further loosen monetary policy, raising hopes that would lift its powerhouse export sector.

The Nikkei 225 index in Tokyo soared 2.3 percent to close at 9,260.34, its highest close since Aug. 5. South Korea's Kospi gained 1.1 percent to 2,025.32, while Hong Kong's Hang Seng jumped 2.1 percent to 21,365.23, its highest finish since Aug. 4.

Mainland Chinese shares advanced with the benchmark Shanghai Composite Index climbing 0.9 percent to 2,366.70, its highest close this year. The Shenzhen Composite Index gained 1.5 percent to 925.99.

Benchmark oil for March delivery moved up 84 cents to $101.58, also brushing off troubles in Greece to focus on tensions in the Middle East that could lead to a tightening of supplies.

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Associated Press writers Gabriele Steinhauser in Brussels, Pamela Sampson in Bangkok, Pan Pylas in London and Joe McDonald in Beijing contributed to this report.

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