Greece downgraded as Europe's debt crisis worsens

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Greece downgraded as Europe's debt crisis worsens

By NICHOLAS PAPHITIS and PAN PYLAS Paphitis And Pan Pylas – 17 mins ago

ATHENS – Europe's government debt crisis worsened ominously Tuesday when

Greece's credit rating was downgraded to junk status and Portugal's debt was

lowered on fears the trouble could spread. Stocks slid on the news.

The Portuguese downgrade was a sign the European Union's fears of that the debt

crisis would spread beyond Greece — and further undermine the euro currency —

might be coming true.

For its part, Greece has already admitted it can't pay debts coming due shortly

and reached for a bailout. But the reluctance of the largest country using the

euro — Germany — to fund the largest share of the euro45 billion rescue by

European government and the International Monetary Fund is sending shudders

through markets.

Investors fear the money may not reach Greece to enable it to avoid default by

May 19, when euro8.5 billion in bond payments come due.

Greek Finance Minister Papaconstantinou said on Greek television that the

country will " absolutely and without any doubt " be able to service that debt.

" Everyone now understands that there is no more time for delay, " he said, adding

that there was no chance Greece would restructure its debt, a concept he called

" outside every negotiation. "

" I am categorical on this point, " Papaconstantinou said.

The minister said Athens was close to reaching an agreement with the IMF, the

European Central Bank and the European Commission on details of the rescue

package, and that talks could " easily " be completed by Sunday.

The FTSE 100 index of leading British shares closed down 2.6 percent, Germany's

DAX slid 2.7 percent and the French CAC-40 in France ended 3.8 percent lower. On

Wall Street, the Dow industrial average was down 132.25 points, or 1.2

percent, at 11,072.78 around midday New York time while the broader Standard &

Poor's 500 index tumbled 18.17 points, or 1.5 percent, at 1,193.34.

Greek and Portuguese share were pounded, down 6.7 percent and 5.4 percent. The

interest rate gap, or spread, between Portuguese and benchmark German 10-year

bonds trading on financial markets — a key indicator of market skepticism — rose

57 basis points, or more than half a percentage point, to hit 5.86 percentage

points. The higher the gap, the less confidence in Portugal — and it was the

widest gap since the shared euro currency, which Portugal and 15 other nations

use, came into circulation.

Both governments have imposed budget cutbacks against political resistance from

unions at home. Markets have been skeptical that they can push through enough

cuts, given political resistance, to put their finances in order.

Greek government spokesman Giorgos Petalotis, speaking to AP after news of

downgrade, said, " This shows that the problem is broader, and concerns all the

other countries and not just Greece. As a country, we are doing everything

necessary to overcome this difficult situation — we are taking the measures and

decisions that have been asked of us for sometime now. "

Asked if the downgrade news means bailout negotiations need to be speeded up,

Petalotis answered, " I think the need to them speed up, is something everyone

can assess. "

Portugal's finance minister said the downgrade would only make things worse.

" This is a decisive moment, " Finance Minister Teixeira dos Santos said

in a statement, urging political parties in opposition to his minority Socialist

government to help swiftly enact debt-reduction measures he has outlined in his

austerity plan.

" Regardless of the opinion we have in relation to the fairness and update of the

rating, the fact is that this decision will not help markets to calm down, but

will, on the contrary, contribute for their turbulence, " Teixeira dos Santos

said.

The spreading trouble threaten more woes for the shared euro currency, and raise

the possibility of trouble spreading even further to Spain, whose economy is far

larger than that of Greece or Portugal. Eurozone governments, themselves facing

higher debt levels from the global recession, would be hard pressed to find

enough money to bail out Spain if it comes to that.

The crisis has highlighted the inability of the rules set up to support the euro

to keep governments from undermining the currency by running up big debts. Those

rules limited deficits to 3 percent of grosse domestic product but have been

widely flouted, and EU officials are talking about ways to strengthen them.

Skourias, chief investment officer at Pegasus Securities, said that

markets were already pricing in a Greek default or restructuring, while rising

spreads on Portuguese bonds showed that " the more important and main risk is the

contagion effect. And I think that the Germans do not realize this risk. "

Germany wants to see a commitment to deep, long-term cutbacks in Greek

government services and benefits before it agrees to provide its euro8.4 billion

euro of the bailout cash. But investors remain highly skeptical that Greek

voters used to generous benefits and worker protections will accept a drop in

living standards. They also worry that the proposed bailout will not cure

Greece's long-term imbalance between its soaring debt and tepid prospects of

economic growth.

Papaconstantinou said it was out of the question for Berlin to prevent the

rescue from working.

" It is totally inconceivable for German to block this mechanism ... And the

Germans have said that that they have no intention of doing anything like this, "

he said, adding that as far as drawing funds was concerned, " some countries will

come first, some countries will follow. "

If there was a delay in Germany's parliament in approving the package, " the

other countries, together with the IMF will be there, so that there is no

problem, " the minister said.

The move deprives Greece of an investment-grade rating on its bonds, meaning it

would pay higher costs to borrow if it taps debt markets again. The agency said

Greece's weak long-term growth prospects made it less credit-worthy.

" The Greek bond market is now in full scale meltdown, " said

Batstone-Carr, head of private client research at stockbrokers Stanley.

" The nightmare scenario from an investor stand point is that either Greece

defaults, forcing investors to take a severe 'haircut' on their

investments-loans, or the Greek authorities could honor the country's debts and

simply shut down all nonessential operations, markedly escalating the strife for

the nation's people. "

Default would hurt the shared euro currency and could lead to the debt crisis

spreading to other countries with shaky finances such as Portugal and Spain,

threatening them with the same vicious spiral of default fears leading to higher

rates.

A debt downgrade immediately preceded Greece's call for the bailout last week.

While Portugal has less debt, economists have focused on it as the next possible

victim if concerns over high levels of government debt in Europe spread.

Standard & Poor's downgraded its credit rating on Portugal amid mounting

concerns about the country's ability to get a handle on its debt load, saying

that the two-notch downgrade to A- reflects its view of " the amplified risks

Portugal faces. "

Greek company shares plunged for a fifth straight session Tuesday, with the

benchmark Athens stock index shedding 6.75 percent to reach 1,683.08 points in

late afternoon trading. The message from the markets is clear — there are real

doubts that Athens will be able to service its debts.

" The market is pricing in the realistic prospect that Greece may not be in a

position to meet all its debt obligations, " said Jane Foley, research director

at Forex.com.

Athens now faces a long, nail-biting wait with far from guaranteed results

before its mid-May payment date.

" Until that day, everything must be concluded, " Papaconstantinou said. " I have

absolutely no doubt that we will get there. "

Prime Minister Papandreou said his country stood " naked before

international market storms. "

" We are going through Greece's hardest time in recent decades, " Papandreou told

his Socialist party lawmakers. " The challenges our country faces are

unprecedented, not only for Greece, but also for Europe and even the world

economy. ... And what I say is no exaggeration. "

___

Pylas contributed from London. Associated Press Writer Gatopoulos in

Athens contributed to this report.