April 28, 2010 in Business

European financial woes spreading to Portugal

Greek bonds lowered to junk status; euro slides to eight-month low
Nicholas Paphitis And Pan Pylas Associated Press
 
Associated Press photos photo

Unemployed school teachers chant slogans at an anti-government demonstration staged by civil servants outside the Greek Parliament in Athens on Tuesday. Greece’s debt crisis intensified Tuesday as its credit rating was cut to junk status. Associated Press photos
(Full-size photo)(All photos)

ATHENS – Ratings agency Standard & Poor’s pushed Greece to the brink of a financial abyss Tuesday and downgraded Portugal’s debt, too, fueling fears of a continent-wide debt meltdown in Europe.

Stocks around the world tanked when Greek bonds were lowered to junk status and investors saw that Greece’s financial contagion was spreading to at least one other eurozone country.

Major European exchanges fell more than 2.5 percent, and on Wall Street, the Dow Jones industrial average finished down more than 200 points. The euro slid more than 1 percent to nearly an eight-month low.

“We have the makings of a market crisis here,” said Neil Mackinnon, global macro strategist at VTB Capital.

Greece is struggling with massive debt, and with prospects for economic growth weak it could end up in default. Its 15 eurozone partners and the International Monetary Fund have tried to calm the markets with a rescue package, but it hasn’t worked.

Standard & Poor’s warned that holders of Greek debt could take large losses in any restructuring, but a greater worry is that Greece’s debt crisis is mushrooming to other debt-laden members of the eurozone.

One bailout can be dealt with but two will be stretching it, and there are fears that other weak economies could be pulled down in the Greek spiral – including Europe’s fifth-largest, Spain.

The crisis threatens to undermine the euro and make it harder and more expensive for all eurozone governments to borrow money.

It has also disrupted cooperation between eurozone governments, with Germany resisting the idea of bailing out Greece unless strict conditions are met.

Many investors think Greece will have enough money to avoid default in the coming weeks, but the future is cloudier.

Both Standard & Poor’s and the Greek finance ministry insisted that the country will have enough money to make bond payments due on May 19.

Even if it does, Greece faces years of austerity with living standards sharply reduced. Standard & Poor’s warned that the Greek economy was unlikely to be as big as it was in 2008 for another decade.

Junk status sinks Greece’s hopes even deeper. Losing investment-grade status for its bonds means that Greece will have to pay higher costs to borrow if it taps debt markets again and increases the chances that existing debt will have to be restructured.

“The latest developments mean that the chances of Greece solving this situation without restructuring its debts are now dim,” said Diego Iscaro, senior economist at IHS Global Insight.

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