Spain credit rating cut hammers European stocks, Euro

Spain credit rating cut hammers European stocks, Euro

London: European shares tumbled and the euro sank to a new one-year low against the dollar on Wednesday after Spain was hit by a credit downgrade, fuelling fears of a widening eurozone debt crisis.

Standard & Poor’s cut the long-term debt rating of Spain by one notch, one day after it sent shockwaves through the markets by relegating Greek bonds to junk status and downgrading Portugal by two notches.

“The downgrade of Spanish government debt by S&P is another alarming sign that the effects of the Greek crisis are spreading," said European economist Ben May at research firm Capital Economics in London.

The European single currency nosedived to $1.3128 after the Spanish downgrade, reaching a level last seen in late April 2009.

The borrowing costs of small eurozone countries with big deficits, including Spain, Portugal and Ireland, jumped as fears that the Greek debt debacle will spread to them intensified with the latest credit downgrades.

European stock markets closed lower. London’s benchmark FTSE 100 index shed 0.30%, the Paris CAC 40 index plunged 1.50% and the Frankfurt Dax dropped 1.22%.

The Madrid stock exchange fell nearly 3% with banks leading the losses as Santander, Spain’s biggest bank, shed 4.81%.

On the diplomatic front, Germany came under growing pressure to stop stalling the activation of a European Union-IMF bailout.

European Central Bank President Jean-Claude Trichet warned time was fast running out and Germany must quickly decide whether to contribute its share.

“There is an absolute necessity to decide very rapidly," he said after meeting German Finance Minister Wolfgang Schaeuble, IMF chief Dominique Strauss-Kahn and top German lawmakers in Berlin.

Strauss-Kahn warned: “It is the confidence in the whole zone that is at stake," referring to the 16 countries that share the single currency.

EU President Herman Van Rompuy said the bloc’s leaders would meet on May 10 and talks were advancing to enable Greece to tap up to €45 billion ($60 million) in loans from the EU and the IMF.

S&P said it lowered Spain’s long-term sovereign credit rating by one notch to “AA" from “AA+" because the country was “likely to have an extended period of subdued economic growth, which weakens its budgetary position."

Phil McHugh, a forex dealer at Currencies Direct, said: “The downgrade of Spain highlights further evidence of contagion heaping more pressure on the euro.

“We could now see this contagion filtering through to Ireland and Italy to complete the PIIGS cycle," he said, employing an acronym used by analysts to lump together Portugal, Italy, Ireland, Greece and Spain.

McHugh warned that the euro could fall below $1.30 in the short term and potentially under $1.20 “if the EU/IMF do not reassure the markets in the near term."

The interest rate demanded by investors to hold Portuguese, Italian, Irish and Spanish debt rose again as the yield on Greek bonds reached punitive levels at around 10%.

The yield, or return, on 10-year bonds from Portugal rose to 5.77%, from Ireland to 5.27%, from Italy to 4.10% and from Spain to 4.11%.

In other European markets, the Lisbon stock exchange was down 1.89% and Milan was down 2.43%.

Athens closed 0.63% higher after the Greek stock exchange imposed a ban on short-selling -- the sale of securities or commodity futures not actually owned by a seller who hopes to buy them back later at a lower price.

In earlier Asian trade, Tokyo slumped 2.57% and Hong Kong dived 1.26% amid heightend eurozone debt concerns.

Wall Street shed 1.90% overnight as the Greek and Portuguese downgrades reverberated across the globe.

But it slightly recovered in opening trade Wednesday with the Dow Jones Industrial Average rising 0.50% as investor were bargain-hunting after the previous day’s heavy falls.