Greece rattles markets as Spain downgraded

10:58, April 29, 2010      

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Global concerns over a potential Greek default and spreading debt problems in the eurozone deepened Wednesday as the country's borrowing costs surged, a day after ratings agency Standard & Poor's downgraded Greece's bonds to junk status, which led to sliding stocks around the world.

The ratings firm Tuesday dropped Greece three pegs to BB+, the first level of speculative status, even below that of Iceland, which rocked global markets when its main banks imploded at the start of the global financial crisis. The outlook is negative, meaning the agency could downgrade Greece again. Moody's Investors Service rates Greece A3, while Fitch Ratings puts it at BBB-.

The most-indebted country in Europe, relative to the size of its economy, has about 296 billion euros of bonds outstanding, and the government is grappling with a budget deficit of almost 14 percent of gross domestic product, according to data compiled by Bloomberg.

In issuing the downgrade, S&P cited the "political, economic, and budgetary challenges that the Greek government faces in its efforts to put the public debt burden onto a sustained downward trajectory."

The downgrade to junk status

by S&P led investors to dump Greece's bonds, driving yields on two-year notes above 25 percent Wednesday from 4.6 percent a month ago, and 10-year notes above 11.5 percent. The higher the interest rates, the lower the confidence in Greece.

Greece has entered "a death spiral of government insolvency," Thomas Mayer, chief economist at Deutsche Bank, Germany's largest bank, told Reuters.

The company cut the long-term rating on Spain to 'AA' from 'AA+' Wednesday.

"The negative outlook reflects the possibility of a downgrade if Spain's budgetary position underperforms to a greater extent than we currently anticipate," the company said in a release.

S&P also lowered its rating on Portuguese bonds by two notches to A- Tuesday, indicating that Greece's financial troubles are spreading to other highly indebted eurozone countries.

"It's not a question of the danger of contagion. Contagion has already happened," Angel Gurria, secretary general for the Organization for Economic Cooperation and Development, said in a Bloomberg television interview Wednesday in Berlin. "This is like Ebola. When you realize you have it, you have to cut your leg off in order to survive."

Stocks extended a global slide and commodities dropped in reaction to the signs of "contagion," with the euro tumbling to a one-year low against the dollar Tuesday.


Bailout talks between Greece, European authorities and the International Monetary Fund (IMF) began in Athens last week after Greece asked for as much as 45 billion euros in emergency loans from eurozone governments and the IMF this year, at a rate of about 5 percent.

Greek and European Commission officials have said the first tranche of aid will be paid before May 19, when Athens will need to refinance a maturing 8.5 billion euro 10-year bond.

But the markets are not convinced that governments have the political will to reach and sustain an agreement on the aid, especially in Germany, Europe's biggest economy. The joint European Union-IMF package would require Germany to stump up the biggest individual loan to Greece, which met with strong opposition from the public.

"Why do we have to pay for Greece's luxury pensions?" Germany's biggest-selling tabloid newspaper, Bild Zeitung, asked on its front page Tuesday. Almost 60 percent of Germans polled don't want to help Greece, Die Welt newspaper reported, citing a survey of 1,009 people.

The heads of the IMF, the European Central Bank and other financial institutions were due to meet with German Chancellor Angela Merkel, who faces a crucial state election May 9.

Markets will be watching the meeting for a positive signal. German Finance Minister Wolfgang Schaeuble has insisted Germany will not let Greece fail, the AP reported.

IMF chief Dominique Strauss-Kahn told German policy makers the aid package for debt-crippled Greece would be worth between 100 and 120 billion euros over three years, against the 45 billion euros pledged to date, Reuters reported.


Although the European Commission insists that the bailout of Greece will not involve restructuring its debt, German Christian Democrats' budget spokesman said Tuesday that his party would raise the idea of forcing investors to take a discount on Greek debt with the IMF and the European Central Bank Wednesday.

Even if Greece obtains international aid this year and over the next few years, many analysts think its uncompetitive economy may continue to struggle in the eurozone's monetary straightjacket, ultimately forcing a debt default, Reuters said.

A Reuters poll of about 50 economists last week found them estimating a 23 percent chance of a Greek default within five years.

Holders of Greek bonds may recover only 30 to 50 percent of their investments in the event of a Greek restructuring or default, according to S&P.

Zhao Xijun, a finance professor at Renmin University of China, told the Global Times that it's hard to estimate now the influence that Greek debt woes will have on world financial markets.

"Except for the substantial losses to bondholders, it will create panic fears among investors of the global financial market," Zhao said.

The IMF warned in its World Economic Outlook report last week that the world risked a "debt explosion" if public finances weren't reined in.

"There will be some negative impact to most credit space, including emerging market sovereign and quasi-sovereign bonds, but I don't think it will be long lasting," Desmond Soon, head of fixed income at DBS Asset Management in Singapore, was quoted by Reuters as saying.

Source: Global Times


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