Wednesday, April 28, 2010

Widespread fallout from Greece's deficit

The International Monetary Fund is looking at raising its share of Greece's financial rescue package by €10 billion [$13.2 billion] amid fears that a planned €45 billion bail-out will fail to prevent the country's debt crisis from spiralling out of control [FT / Reuters]. 

Stocks around the world took a dive Tuesday as Portugal showed signs it too was being affected by the crisis. Europe faces renewed economic turmoil after Greece's credit rating was slashed to "junk status" by Standard and Poor. Portugal was also downgraded by the agency. 

On Wednesday Greece's securities regulator banned short-selling in shares on the Athens bourse until June 28 after investors responding to the country's deepening debt crisis ditched Greek assets a day earlier. European shares dropped in early trading Wednesday, following falls on Wall Street and a slide in Asian markets overnight. There are mounting concerns that Greece's debt problems will spread and that public opposition in Germany against bailing out debt-stricken Greece could hamper efforts in pulling Greece from the quagmire of economic ruin.

In the US the Dow sank 213 points, or 1.9%, and the S&P plunged 2.3%. The Nasdaq also dived some 2%. Meanwhile Asian markets saw similar losses. Japan's benchmark Nikkei index lost 2.6% and the Hang Seng in Hong Kong closed 1.4% lower. The Shanghai Composite declined 0.3%. Concerns about a euro zone debt crisis has helped strengthen the dollar which climbed 1.5% against the euro on Tuesday to $1.3176 [FT / CNN]

In Britain where an election campaign is in full swing, some newspapers were warning that the country needed to take action in order to avoid similar problems face by Greece. The Daily Mail said that Britain had a similar deficit ratio to Portugal and warned that if the national debt was not reduced immediately, Britain's credit rating also risked being downgraded with devastating results for interest rates and the pound. Conservative leader David Cameron also voiced his concern. "This is a warning of what can happen if you don't pay back your debts," he said. But Prime Minister Gordon Brown has said Britain would not go the same way as Greece.

In Greece the interest rate on two-year government borrowing ended Tuesday at 13.5%. Some commentators have said it is now considered safer to lend money to Iraq or Venezuela than to Greece [BBC]. When ratings agencies downgrade the country's credit rating it means they think it is a riskier place to invest. If it reaches junk status, a country loses its investment grade status. The dilemma is what to do about the situation. While Germany's Angela Merkel initially backed plans to bail out Greece, she has faced a public back-clash. 

"Germany will help if the appropriate conditions are met," Merkel said. "Germany feels an enormous obligation towards the stability of the euro. If Greece is ready to accept tough measures, not just in one year but over several years, then we have a good chance to secure the stability of the euro for us all." However she did not elaborate on what conditions would be put forward though Merkel rejected the idea of expelling Greece from the eurozone.

Greece's budget deficit last year was 13.6% of GDP, one of the highest in Europe and more than four times the limit under eurozone rules. The country's debt currently stands at about €300 billion. Because of the impact on the common European currency there are fears that Greece's troubles in the international financial markets will trigger a domino effect, toppling other weak members of the eurozone, such as the so-called "Piigs", Portugal, Ireland, Italy and Spain as well as Greece, all of whom face challenges to re-balance their books. Just as the global economic crisis appeared to be over, Greece has become a rather large fly in the ointment [BBC].

tvnewswatch, Beijing, China

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