Market in turmoil as euro crisis deepens on Greece
Downgrades of Portuguese, Greek debts threaten eurozone
THERE was pandemonium in the market for short-term government loans as downgrades of the debts of Greece and Portugal threatened to turn the Greek crisis into a full-blown euro crisis.
Ireland was dragged into the maelstrom, with the interest rate on two-year loans surging almost half a percentage point to 3.44pc.
Portuguese rates went up 0.8 points, while Greek bonds were virtually untradeable at a yield of 15.26pc.
"The contagion risk is real. It's much easier to bail out a bank than to bail out a country," said Axel Botte, strategist at AXA Investment Managers in Paris.
The S&P's Ratings Services agency cut its ratings on Greek debt by three steps to what is known as junk status, while Portugal's was cut two notches.
S&P's assigned a probability that investors in Greek government bonds may get back only between 30pc and 50pc of the value of their holdings should the government default or restructure its debt.
There was, however, analyst support for Ireland. A report from Deutsche Bank said the fiscal and banking sector reforms in Ireland "bode well" for the economy, as does the rebound in its main trading partners.
They warned that a debt default and re-structuring in Greece would not only risk significant contagion to other peripheral countries, but also an interbank crisis.
The turmoil comes as European Union leaders struggle to agree on measures to ease the market panic over swelling budget deficits.
They may hold a summit on the crisis, a European diplomat said, but upcoming regional elections in Germany have put doubts over the commitment of the euro area's largest member to rescuing the situation.
Yesterday, the budget spokesman for Germany's junior coalition partner, the Free Democrats, said a contribution to the rescue from Germany was not yet guaranteed.
"One may have to say no if Greece does not meet conditions and the country just comes along to get money under more favourable terms from the eurozone than from banks," Juergen Koppelin said.
Such uncertainty has now helped spread the crisis beyond Greece, Austin Hughes, chief economist at KBC Bank in Dublin, said.
"There is a sense that things are coming to a head. If eurozone leaders find it so difficult to agree on support for Greece, how much more difficult will it be to agree on broader measures to deal with the euro area's problems?"
Some analysts and traders think that debt default may even become policy to help less competitive economies in the euro. "Debt devaluation is the new currency devaluation in the eurozone," said Stuart Thomson at Ignis Asset Management in Glasgow.
"We expect a Greek haircut first; three months later a Portuguese haircut," he said in an interview.