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Markets Slump on Europe Debt Worry

05 May 2010 22:41 (UTC +04:00)

Baku â€“ APA. As demonstrators took to the streets in Greece to protest the governmentâ€™s austerity plan, traders, worried that the Greek debt crisis would spread, sent indexes lower for a second day, APA reports quoting â€œThe New York Timesâ€.
The euro took the brunt of the fallout, dropping to $1.2896 from $1.2988 late Tuesday. Some analysts have estimated the currency could fall as low as $1.20 by the end of the summer.
The Dow Jones industrial average, which had its biggest drop in three months on Tuesday, was down 22.98 points, or 0.19 percent. At one point Wednesday morning, the Dow was down about 100 points. The Standard & Poorâ€™s 500-stock index dropped 0.31 percent or 3.65 points, and the Nasdaq fell 0.69 percent or 16.02 points.
In Europe, indexes turned lower in afternoon trading. The Euro Stoxx 50 index, a barometer of euro-zone blue chips, was down 0.98 percent. The FTSE 100 index in London was down about 1.3 percent. The DAX in Frankfurt was down 0.63 percent while the CAC-40 in Paris fell 1.3 percent.
Despite the rescue package that the European Union and International Monetary Fund offered Greece, there are concerns that the crisis could turn into a full-blown European banking disaster that could choke credit to businesses and consumers at a time when the Continentâ€™s economy remained fragile.
Foremost among the worries is the possibility that Spain, a country with an economy that dwarfs Greeceâ€™s, might also come under pressure.
Tu Packard, senior economist at Moodyâ€™s Economy.com, said that the markets were responding to fears of losses in the short term. â€œWhen things start going this way there is not too much you can rule out,â€ Ms. Packard said.
The demonstrations against austerity measures took a deadly turn Wednesday in Greece when three people died in a Athens bank that was set on fire. Policymakers in Germany, meanwhile, pushed Parliament for quick passage of the Greek bailout, warning that failure to do so could set off a â€œchain reactionâ€ of debt crises around the Continent, a point illustrated by Moodyâ€™s Investors Service saying that it had put Portugal on review for another possible downgrade
â€œWhat the market does see correctly is the failure of leadership in the euro zone and especially in the German leadership.â€ Ms. Packard said.
Kevin Chau, currency strategist with IDEAglobal, said that in addition to watching for any action by Germany policymakers, investors were starting to assess the parliamentary elections in Britain on Thursday and the release of April unemployment figures Friday in the United States.
This meant markets were perhaps poised to slow down, but not reverse, their downtrend, Mr. Chau said.
But most of the attention was on the sovereign debt contagion. Moodyâ€™s said Wednesday that in the event of another downgrade, Portugalâ€™s ratings â€œwould fall by one, or at most two, notchesâ€ â€” meaning they would still be rated investment grade. The review, Moodyâ€™s said, reflected â€œthe recent deterioration of Portugalâ€™s public finances as well as the economyâ€™s long-term growth challenges,â€ and it noted that â€œthe governmentâ€™s debt is neither unsustainable nor unbearable.â€
The concerns were reflected in the market even before the announcement: Portugal sold 500 million euros, or about $650 million, of six-month treasury bonds at an interest rate of 2.955 percent Wednesday, about four times the 0.739 percent it paid in March for a similar offering.
Rating agencies also warned that European banks could come under pressure. The banks are big holders of government debt, and their loan losses could mount as economies stagnate.
In addition, the gap, or spread, between Greek and German 10-year bonds widened to more than 7 percentage points from about 6.4 points Tuesday. That spread represents the extra interest cushion investors demand to hold the Greek bonds, which are perceived as more risky. The equivalent Portuguese bond yield rose 16 basis points to 5.6 percent. The yield on Spainâ€™s equivalent bonds rose a modest 3 points, to 4.1 percent.
The European Union itself warned of â€œhigh uncertaintyâ€ surrounding the regionâ€™s economic recovery, even as it revised its growth forecast for this year upward, to 1 percent from 0.75 percent for the entire 27-nation bloc.
For the 16 countries using the euro, the European Commission predicted economic growth would be 0.9 percent this year, up from the 0.7 percent it forecast in February, mainly because of improvements in exports.
â€œWe must now ensure that growth will not be derailed by risks related to financial stability,â€ the unionâ€™s Economic and Monetary Affairs Commissioner Olli Rehn said in a statement.
Defending her decision to support the bailout before the German Bundestag, Chancellor Angela Merkel said the rescue plan was â€œabout nothing less than the future of Europe and the future of Germany in Europe.â€
Mrs. Merkel, who is seeking support for the package in a parliamentary vote Friday, said Germany would shoulder its portion of the aid package to help prevent â€œa chain reaction that would contaminate the markets.â€
Axel Weber, a member of the European Central Bankâ€™s governing council as head of Germanyâ€™s Bundesbank, called the contribution from Berlin â€œjustifiable.â€ Mrs. Merkel has put the figure at 22.4 billion euros in loans over three years.
â€œThere is a threat of grave contagion effects for other member states in the monetary union and increasing negative feedback loop effects on capital markets,â€ Mr. Weber said in a statement
Most Asian markets fell Wednesday. The Hang Seng index in Hong Kong slumped 2.1 percent and the Australian benchmark S&P/ASX 200 index fell 1.3 percent. The Shanghai composite index bucked the trend, adding 0.8 percent. Markets in Japan were closed for a holiday.