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Financial markets rocked by Greek crisis

Financial markets rocked by Greek crisis
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First Published: Tue, Apr 27 2010. 08 11 PM IST
Updated: Tue, Apr 27 2010. 08 11 PM IST
London: European equities and the euro plunged on Tuesday as financial markets were dogged by the Greek debt crisis and fears that the risk could spread to other eurozone nations, analysts said.
The London stock market dived 1.22%, Frankfurt fell 0.76% and Paris shed 1.68%, amid fears that the spreading Greek debt crisis may engulf other debt-laden eurozone nations like Portugal, Ireland and Spain.
Athens meanwhile plunged by more than five percent at one stage amid negotiations on a debt bailout for Greece and a dire warning from the nation’s central bank over the economy.
The European single currency dived as low as $1.3278 in afternoon London trade. It later stood at 1.3307, up from $1.3378 in New York late on Monday.
On the bond market, the interest rate demanded by investors to hold Greek 10-year debt rose to a new record level above 9.5%.
And the rate for Portuguese debt was above 5.6%, while Irish and Spanish bond yields also stretched higher.
“It can really be summed up in one word — contagion,” CMC Markets analyst Michael Hewson told AFP.
Estefania Ponte, head of the economy and strategy department at BNP Paribas Fortis in Madrid, said the stock market was falling because the interest rate demanded by investors to hold Spanish 10-year debt had risen.
“There is a contagion effect from Greece. Greece, Portugal and Spain are in the line of fire,” she told AFP.
Hewson added: “Spanish and Portuguese bonds are also under pressure, while (German Chancellor) Angela Merkel plays a game of political chicken with the voters in Germany who oppose a bailout by about two to one.”
Greece has already asked the European Union and International Monetary Fund to activate a three-year rescue package worth up to €45 billion ($60 billion) in the first year.
However, the bailout is shrouded in uncertainty, with Germany insisting that Athens must first demonstrate how it plans to get its public finances in order before it gets the money.
“It is still the uncertainty surrounding this Greece bailout,” added Spreadex trader David Rees.
“It was agreed last week, but we are still no closer to getting any details of what/how this bailout will evolve and also now people are questioning whether the bailout will actually prevent Greece from defaulting anyway.”
To compound matters, the EU/IMF rescue package may not be enough to resolve the wider problem of debt, according to VTB Capital economist Neil MacKinnon.
“The markets are worried that any fresh EU/IMF package to cover Greece’s funding needs in the short term are not enough to resolve the problem of worsening debt sustainability,” MacKinnon told AFP.
“Double digit interest rates and triple-digit debt levels are a recipe for debt restructuring and eventual default.”
“This and the risk of contagion is weighing on the euro — and further weakness looks likely as the eurozone absorbs Greek government liabilities.”
The Greek government is facing a desperate race against time to secure the loans ahead of a 19 May deadline to pay bondholders some nine billion euros.
Adding to the pressure, the Greek central bank warned on Tuesday that the economy could shrink by more than two percent this year, worse than expected, and called for further austerity measures to reassure sceptical investors.
Greece’s prime minister appealed for patience Tuesday to beat the country’s debt crisis and warned of a sea change in policy to restore economic viability as he faced a backlash for seeking outside help.
In an address to parliament, Prime Minister George Papandreou said Greece needed “time and serenity” to carry out profound reforms and that “everything must change” in order to make its debt-shaken economy viable again.
In Asia on Tuesday, risk-averse investors mostly shrugged off upbeat earnings reports and stronger-than-expected growth in South Korea’s economy to take profits Tuesday after the previous day’s strong gains.
Markets also awaited the outcome from the US central bank’s two-day policy-setting Federal Open Market Committee meeting, which was to begin Tuesday, for its assessment for recovery in the world’s largest economy.
Hong Kong fell 1.51%, Shanghai tumbled 2.07%, while Tokyo picked up from earlier lows to end 0.42% higher.
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First Published: Tue, Apr 27 2010. 08 11 PM IST
More Topics: Stocks | Forex | Bonds | Greece | Euro |