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European finance chiefs sought to bolster international confidence in Greece’s ability to cut its budget deficit by endorsing the country’s austerity plan and promising to ensure the government delivers on it.

“The European members of the G-7 will make sure it is managed,” French Finance Minister Christine Lagarde told reporters on Feb. 6 after meeting counterparts and central bankers from the Group of Seven in Iqaluit, Canada. European Central Bank President Jean-Claude Trichet said the ECB is “confident” Greece will cut its deficit below the limit of 3 percent of gross domestic product in 2012 from 12.7 percent.

The struggles of the Greek government to convince investors it can reduce the largest budget gap in the European Union without outside assistance forced their way on to the agenda of the G-7 talks after the MSCI World Index of stocks fell to its lowest in four months on concern of a default.

“I just want to underscore they made it clear to us, they the European authorities, that they will manage this with great care,” U.S. Treasury Secretary Timothy F. Geithner said in Iqaluit. “The European authorities gave us a very comprehensive review of the program now in place to address the challenges faced by the Greek economy.”

Greek bonds have tumbled in the past two months, pushing the yield on the country’s 10-year debt above 7 percent, the highest since 1999, the year the euro began trading. The premium investors charge to hold Greek 10-year bonds over the benchmark German bund has widened to 356 basis points, about 10 times what it was two years ago, and credit-default swaps on Greek debt rose to a record on Feb. 5.

Foreign-Exchange Markets

“No measure of official reassurance would be enough unless the nations in question retain credibility in financial markets, which remains to be seen,” Geoffrey Yu, a currency strategist at UBS AG in London, said in a note to clients. “We expect foreign-exchange markets to continue trading on a risk-averse tone.”

Borrowing costs have also jumped for Portugal and Spain, raising concern among policy makers that Greece’s woes will be shared elsewhere in Europe and overseas as governments try to rein in the record budget deficits they ran up fighting the worst global recession since World War II.

“This is a crisis that has been on the horizon for quite a while,” Harvard University Professor Niall Ferguson told Bloomberg Television, adding that Belgium and Italy are also at risk. “The contagion is going to spread.”

‘Intense Concern’

German Finance Minister Wolfgang Schaeuble said in Iqaluit that policy makers outside Europe “have the impression that Europeans will solve this problem and that they’re aware of the problem.” Canadian Finance Minister Jim Flaherty said the size of Greece’s economy means “in global terms it’s not of intense concern.”

Schaeuble said Greece still has to “pay a price” for running up the deficit and said the euro remains “stable.”

“Euro-area members of the G-7 gave an update on the efforts and commitments by the Greece government to ensure fiscal sustainability and economic reform,” Trichet said. “We said that the euro area would continue to monitor closely the implementation of this stability program.”

Greek Prime Minister George Papandreou has already pledged to step up budget cuts if needed and EU Monetary Affairs Commissioner Joaquin Almunia, who also attended the G-7 meeting, said last month that leaders have no “plan B” to help Greece.

Painful Measures

Most Greeks object to increases in the retirement age and fuel taxes even as a majority say painful measures are needed to reduce the budget gap, according to a Kappa Research poll for To Vima newspaper, published yesterday.

Harvard’s Ferguson said Greece’s economy will suffer as it tries to restore fiscal order with the resulting increase in unemployment triggering public strikes. Teachers, hospital workers and tax collectors already have called a 24-hour strike for Feb. 10 and private-sector workers will follow two weeks later.

“It’s going to be messy,” said Ferguson, who predicted Germany and France will provide financial aid if needed. “Suddenly the markets woke up and realized these weren’t credible fiscal policies.”

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