Europe's debt crisis may be prolonged and hamper global economic recovery, Japanese policymakers said on Tuesday, as fears of a double-dip recession piled more pressure on equities and the battered euro.
A month-long selloff has routed global stocks as even a $1 trillion pledge from European leaders was not enough to calm fears that Greece's debt woes would spread to other deeply indebted nations, particularly in southern Europe.
Japan's Nikkei average slid 3 percent to its lowest since December 2009, taking losses since the start of April to about 17 percent, while stocks elsewhere in the Asia-Pacific region tumbled 3.6 percent.
A broad (rescue) package has been mapped out. I was expecting markets to settle and my basic view remains unchanged, Japanese Finance Minister Naoto Kan told reporters.
The euro problems are very deep-rooted as euro zone members share a common currency but fiscal policies are left to each country. I hope financial markets will calm down gradually.
Kan's comments added to a chorus of voices expressing concern about the impact of Europe's debt troubles on a global economy still struggling to recover after the implosion of the U.S. mortgage market sparked the financial crisis in 2008.
White House economic adviser Lawrence Summers also listed Europe's struggle to contain Greece's debt crisis as one several potential troubles facing the U.S. economy.
Last weekend's move by the Bank of Spain to take over the running of a small savings bank, CajaSur, added to market nervousness by highlighted weakness in the European banking sector.
This situation with the Spanish bank makes investors nervous because it raises suspicions that something else may be smoldering behind the scenes, said Hiroichi Nishi, equity division general manager at Nikko Cordial Securities in Tokyo.
The euro resumed its fall, sliding below $1.23, while safe-haven assets such as government bonds rose.
Investors have started to sell the euro, believing that there'll be more banks in trouble, particularly in Southern Europe, said a currency trader at a European bank. The euro's fall has not run its course.
Japan's National Strategy Minister Yoshito Sengoku said he did not expect euro zone economies to recover quickly.
Risks are very big that European problems may disrupt recoveries in Japan and world economy, Sengoku told reporters.
Signs of stress in Europe's banking system emerged as it became clear that the European Union's $1 trillion safety net for euro zone states and a 110 billion euro ($135.7 billion) rescue for Greece had failed to restore confidence in the country, where austerity measures have provoked violent street protests.
Investors' nagging doubts over whether Europe has a unified commitment to tackle its debt problems were underscored by comments from the president of the European Commission, Jose Manuel Barroso.
Barroso called Germany's aim to modify provisions of the EU treaty governing member states' budgets naive, saying it could prompt other members to propose changes in other areas.
We will not propose treaty modifications even though we are open to good ideas, Barroso told the German newspaper Frankfurter Allgemeine Zeitung on Monday.
It would also be naive to think one can reform the treaty only in areas Germany considers important.
The International Monetary Fund's chief economist warned markets will remain concerned until doubts over the EU delivering on its aid promise to the Greek government and Greece's debt-payment history are resolved.
The markets are wondering if Greece will be able to repay its debt or not, Olivier Blanchard said in an interview to be published on Tuesday in La Tribune newspaper. Given the behavior of Greek governments in the past, their uncertainties are understandable.
(Writing by Lincoln Feast; Editing by Tomasz Janowski)