Global stock markets tumbled after Greece's debt was downgraded to "junk" by rating agency Standard & Poor's over concerns that the country may default.
It makes the struggling nation the first eurozone member to have its debt downgraded to junk level.
Portugal's debt was also lowered on fears of "contagion", adding to the markets' rout and a fall in the euro.
Germany immediately said it would not "let Greece fall", and there were signs that an aid package could be increased.
Greece wants 40bn euros (£34bn) from eurozone governments and the International Monetary Fund (IMF) to shore up its finances.
But there are fears it will not meet conditions needed to access the funds it needs to make looming debt repayments.
Doubts intensify
When ratings agencies downgrade the country's credit rating - it means they think it is now a riskier place to invest. If it reaches junk status, a country loses its investment grade status. Some financial institutions have rules prohibiting them from investing in "junk" bonds.
Greece's 2-year government bond yield surged to almost 15% on Tuesday, making it highly expensive for the country to borrow from the debt market.
Greek 5-year yields hit 10.6%, higher than many emerging market economies, including Ecuador at 10.5% and Ukraine at 7.1%.
The 2-year Portuguese bond yield jumped to 5.23% from 4.16%.
S&P said it was lowering its rating on Greece's debt to BB+ from BBB-. It also reducing Portugal's debt rating by two notches to A- as doubts intensified about countries with substantial debt relative to GDP.
Wednesday, April 28, 2010
Greece Cut to Junk at S&P as Contagion Spreads
Greece’s credit rating was cut three steps to junk by Standard and Poor’s, the first time a euro member has lost its investment grade since the currency’s 1999 debut. The euro weakened and stock markets throughout the region plunged.
Greece was lowered to BB+ from BBB+ by S&P, which also warned that bondholders could recover as little as 30 percent of their initial investment if the country restructures its debt. The move, which puts Greek debt on a par with bonds issued by Azerbaijan and Egypt, came minutes after the rating company reduced Portugal by two steps to A- from A+.
The turmoil comes as European Union policy makers struggle to agree on measures to ease the panic over swelling budget deficits. Leaders of the 16 euro nations may hold a summit after the Greek government’s decision last week to tap a 45 billion- euro ($60 billion) emergency-aid package failed to reassure investors, a European diplomat and Spanish official said.
“The markets are demanding their pound of flesh and want everything to be signed, sealed and delivered as of yesterday,” said David Owen, chief European financial economist at Jefferies International Ltd. in London.
The euro fell 1.3 percent to $1.3215 as of 2:58 p.m. in New York. The Stoxx Europe 600 Index slid 3.1 percent to 261.65 points.
Spreads
The spread on Greek 10-year bonds over German counterparts widened 23 basis points to 675 basis points, the highest since at least 1998, as investors increased bets that Greece will restructure its debt. The Portuguese spread jumped 59 basis points to 277 basis points, and the Spanish spread rose 12 basis points to 113.
“This is no longer a problem about Greece or Portugal, but about the euro system,” Eric Fine, who manages Van’s Eck’s G- 175 Strategies emerging-market hedge fund. “My concern is the risk of coordination failure. Policy makers need to get ahead of the curve.”
The crisis worsened this week as German Chancellor Angela Merkel’s government delays a decision on whether to release funds for a Greek rescue. Merkel, who faces an election in the state of North Rhine-Westphalia on May 9, said yesterday that Greece “must do its homework” before getting aid.
Trichet Mission
European Central Bank President Jean-Claude Trichet, who is in Chicago today and declined to comment on the downgrades, travels to Berlin tomorrow to brief German lawmakers on Greece’s deficit-cutting plans. The country is struggling to convince investors it can push its deficit below the EU’s limit of 3 percent of gross domestic product from 13.6 percent last year.
“No one in Europe is suggesting” that “the total amount of financing on the table is going to cover all of Greece’s borrowing needs” over the next three years, said David Beers, Global Head of Sovereign and International Public Finance Ratings, at S&P today.
Greek bonds are still eligible as collateral at the ECB, as long as the other two rating companies don’t follow suit. Moody’s Investors Service rates Greece A3 and Fitch Ratings BBB-.
The EU’s inability to contain the Greek crisis is sparking concern that other countries will have to fend for themselves and will struggle to win support from European parliaments. Portugal’s PSI-20 benchmark dropped 5.4 percent today, the most since the aftermath of Lehman Brothers Holdings Inc.’s collapse. Spain’s IBEX 35 Index dropped 4.2 percent.
Contagion
“There is a clear risk that contagion pressures might intensify in the coming months, perhaps after a brief respite immediately after the Greek package is finalized and money starts being disbursed,” said Marco Annunziata, chief European economist at UniCredit Group in London.
Merkel said yesterday she expects a German decision in “days.” Greece faces 8.5 billion euros of bonds maturing in May, with the first redemption due May 19.
Portuguese Finance Minister Fernando Teixeira dos Santos said today his government needs to react to “attacks by markets” and will do what’s needed to reduce its deficit.
Greek Prime Minister George Papandreou asked for emergency cash from the EU and International Monetary Fund last week to avoid defaulting on its debt. Investors in Greek bonds may get back between 30 percent and 50 percent of the value of their holdings should the government default or restructure its debt, said S&P.
“The financial package has clearly not eased market concerns,” said Colin Ellis, European economist at Daiwa Capital Europe Ltd. in London. The Greek downgrade “together with Portugal and the widening of spreads means that other euro- area countries appear to be sliding to a similar fate.”
To contact the reporter on this story: Andrew Davis in Rome at abdavis@bloomberg.netEmma Ross-Thomas in Madrid at erossthomas@bloomberg.net
Greece was lowered to BB+ from BBB+ by S&P, which also warned that bondholders could recover as little as 30 percent of their initial investment if the country restructures its debt. The move, which puts Greek debt on a par with bonds issued by Azerbaijan and Egypt, came minutes after the rating company reduced Portugal by two steps to A- from A+.
The turmoil comes as European Union policy makers struggle to agree on measures to ease the panic over swelling budget deficits. Leaders of the 16 euro nations may hold a summit after the Greek government’s decision last week to tap a 45 billion- euro ($60 billion) emergency-aid package failed to reassure investors, a European diplomat and Spanish official said.
“The markets are demanding their pound of flesh and want everything to be signed, sealed and delivered as of yesterday,” said David Owen, chief European financial economist at Jefferies International Ltd. in London.
The euro fell 1.3 percent to $1.3215 as of 2:58 p.m. in New York. The Stoxx Europe 600 Index slid 3.1 percent to 261.65 points.
Spreads
The spread on Greek 10-year bonds over German counterparts widened 23 basis points to 675 basis points, the highest since at least 1998, as investors increased bets that Greece will restructure its debt. The Portuguese spread jumped 59 basis points to 277 basis points, and the Spanish spread rose 12 basis points to 113.
“This is no longer a problem about Greece or Portugal, but about the euro system,” Eric Fine, who manages Van’s Eck’s G- 175 Strategies emerging-market hedge fund. “My concern is the risk of coordination failure. Policy makers need to get ahead of the curve.”
The crisis worsened this week as German Chancellor Angela Merkel’s government delays a decision on whether to release funds for a Greek rescue. Merkel, who faces an election in the state of North Rhine-Westphalia on May 9, said yesterday that Greece “must do its homework” before getting aid.
Trichet Mission
European Central Bank President Jean-Claude Trichet, who is in Chicago today and declined to comment on the downgrades, travels to Berlin tomorrow to brief German lawmakers on Greece’s deficit-cutting plans. The country is struggling to convince investors it can push its deficit below the EU’s limit of 3 percent of gross domestic product from 13.6 percent last year.
“No one in Europe is suggesting” that “the total amount of financing on the table is going to cover all of Greece’s borrowing needs” over the next three years, said David Beers, Global Head of Sovereign and International Public Finance Ratings, at S&P today.
Greek bonds are still eligible as collateral at the ECB, as long as the other two rating companies don’t follow suit. Moody’s Investors Service rates Greece A3 and Fitch Ratings BBB-.
The EU’s inability to contain the Greek crisis is sparking concern that other countries will have to fend for themselves and will struggle to win support from European parliaments. Portugal’s PSI-20 benchmark dropped 5.4 percent today, the most since the aftermath of Lehman Brothers Holdings Inc.’s collapse. Spain’s IBEX 35 Index dropped 4.2 percent.
Contagion
“There is a clear risk that contagion pressures might intensify in the coming months, perhaps after a brief respite immediately after the Greek package is finalized and money starts being disbursed,” said Marco Annunziata, chief European economist at UniCredit Group in London.
Merkel said yesterday she expects a German decision in “days.” Greece faces 8.5 billion euros of bonds maturing in May, with the first redemption due May 19.
Portuguese Finance Minister Fernando Teixeira dos Santos said today his government needs to react to “attacks by markets” and will do what’s needed to reduce its deficit.
Greek Prime Minister George Papandreou asked for emergency cash from the EU and International Monetary Fund last week to avoid defaulting on its debt. Investors in Greek bonds may get back between 30 percent and 50 percent of the value of their holdings should the government default or restructure its debt, said S&P.
“The financial package has clearly not eased market concerns,” said Colin Ellis, European economist at Daiwa Capital Europe Ltd. in London. The Greek downgrade “together with Portugal and the widening of spreads means that other euro- area countries appear to be sliding to a similar fate.”
To contact the reporter on this story: Andrew Davis in Rome at abdavis@bloomberg.netEmma Ross-Thomas in Madrid at erossthomas@bloomberg.net
SEND IN THE DRONES: PREDATORS TO FLY ABOVE TEX-MEX BORDER
SEND IN THE DRONES: PREDATORS TO FLY ABOVE TEX-MEX BORDER
Homeland Security Secretary Janet Napolitano told a Senate hearing Tuesday that unmanned aerial drones will soon fly through Texas skies!
"Big Sis" declared that over the past 15 months, federal law enforcement initiatives have made the border more secure than in any other time in history, the SAN ANTONIO EXPRESS-NEWS reports in Wednesday editions.
The new "predator bees" have the capability to fly at altitudes used by commercial aircraft, and are designed to enhance intelligence capabilities of federal, state and local law enforcement.
But a recent analysis of the use of unmanned aerial vehicles found that they were twice as likely to crash as manned aircraft, according to the Congressional Research Service.
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