Debt Ratings Are Lowered for Portugal and Greece/As Debt Fears Grow, Finance Ministers to Meet in Europe

Debt Ratings Are Lowered for Portugal and Greece
By JACK EWING
Copyright by The Associated Press
Published: April 27, 2010
http://www.nytimes.com/2010/04/28/business/global/28drachma.html?emc=na


FRANKFURT — Greece’s credit rating was lowered to junk status Tuesday by a leading credit agency, a decision that rocked financial markets and deepened fears that a debt crisis in Europe could spiral out of control.

The ratings agency, Standard & Poor’s, downgraded Greece’s long-term and short-term debt to non-investment status and cautioned that investors who bought Greek bonds faced dwindling odds of getting their money back if Greece defaulted or went through a debt restructuring. The move came shortly after S.&P. reduced Portugal’s credit rating and warned that more downgrades were possible.

The downgrades, announced near the end of trading in Europe, came amid rising political tensions across the Continent that had already punished Greek bonds and sent stock prices down sharply from London to Paris to New York. Investors, worried about shock waves in the broader European economy, migrated away from the euro and pushed the dollar and Treasury bonds higher. The euro slid to $1.3316 in afternoon trading in New York from $1.3382 late Tuesday.

“This is a signal to the markets that the situation is deteriorating rapidly, and it’s not clear who’s in a position to stop the Greeks from going into a default situation,” said Edward Yardeni, president of Yardeni Research. “That creates a spillover effect into Portugal and Spain and raises the whole sovereign debt issue.”

As transportation workers in Portugal and Greece went on strike against austerity measures Tuesday, the risk premium on Greece’s bonds set records even before S.&P. announced the downgrades.

By early afternoon the major indexes on Wall Street had posted some of their sharpest declines in a month. The Dow Jones industrial average fell about 130 points, or 1.2 percent, and the broader S.&P. 500-stock index was 1.5 percent lower, with financial stocks and commodity shares down sharply.

Investors were unsettled by perceptions that European leaders have not yet shown they can contain the fallout from Greece’s problems, as well as the political resistance in Germany to using taxpayer money for a rescue.

“This thing is getting more and more urgent and tense,” said Robert Barrie, head of European economics at Credit Suisse in London. He said the markets could settle down once Greece manages to refinance €8.5 billion, or $11.2 billion, in bonds that mature in May. “But it’s anything but calm at the moment,” he added.

In an effort to show unity, European Union governments may hold a summit meeting May 10 to discuss releasing aid to Greece, according to an E.U. official who was knowledgeable about the ongoing talks on the matter, but who declined to be identified because the date was not yet confirmed.

The meeting could also provide a forum for Germany, where a large majority of voters oppose aid to Greece, to deliver a stern warning to other over-indebted countries that such aid is exceptional and should be avoided in the future.

Amid the turmoil, a European Central Bank official warned all euro-zone countries to cut their soaring budget deficits and suggested that Greece may need to impose even harsher austerity measures to bring its debt under control.

The central bank vice president, Lucas D. Papademos, who was governor of the Bank of Greece from 1994 to 2002, told members of the European Parliament in Brussels that the Maastricht Treaty, which sets out borrowing limits for euro-zone countries, “is facing its biggest challenge since its adoption in 1997.”

The economic program that European officials and the International Monetary Fund are negotiating with Athens in return for €45 billion in loans at interest rates well below what the market is demanding must “address the root causes of Greece’s fiscal imbalances and structural weaknesses, so as to ensure the sustainability of its public finances and improve the country’s international competitiveness,” he said.

On the streets of Greece and Portugal, labor unions stepped up resistance to the austerity measures that will be crucial to any turnaround.

Portuguese public transportation workers went on strike against a government austerity plan intended to cut the budget deficit to 2.8 percent of gross domestic product in 2013 from 9.4 percent last year, Reuters reported. Public employees would face a salary freeze.

“It cannot only be the workers who pay,” said Manuel Leal, spokesman for the Fedtrans transport union, according to Reuters.

Greek transportation workers also walked off the job Tuesday to protest austerity measures, while the country’s labor unions called a national strike for next week.

Among investors there was growing pessimism that Greece would be able to repay its debt, equal to 115 percent of G.D.P., without a restructuring plan that would spread out the payments. Such a plan would effectively cut the value of Greek bond holdings.

S.&P. reinforced fear of a restructuring Tuesday. If there is a default, S.&P. estimated that investors might recover only 30 percent to 50 percent of their money.

German politicians, like Frank-Walter Steinmeier, leader of the opposition Social Democrats in Parliament, have fed speculation about a restructuring plan by calling for banks to share the costs of a Greek rescue. Greek and European Union leaders say restructuring is not on the table.

S.&P. forecast that Greece’s debt problems would only get worse, rising to 131 percent of GDP in 2011, the agency said. At the same time, growth would be nearly flat until 2016, meaning that the government could not count on expansion to lift tax receipts.

The agency also noted that the debt crisis was putting increasing pressure on Greek companies and banks. Greek businesses typically must pay interest rates tied to the rate on government bonds, and Greek banks are vulnerable because of their extensive holdings of their government’s debt.

Stock markets in Europe tumbled after the announcements.

In London, the FTSE 100 closed down 2.7 percent, the CAC-40 in Paris shed 3.8 percent and the IBEX 35 in Spain lost 4.2 percent. The PSI 20 index in Lisbon was off 5.4 percent and the Athens stock exchange general index slid by 6 percent, taking its year-to-date losses to 22.8 percent.

Banks were hit hard. The financial sub-sector of the Euro Stoxx 600 index lost 3.9 percent. UBS, the Swiss bank, lost 4 percent and Société Générale of France fell by 6 percent. Shares in National Bank of Greece tumbled 10 percent and Agricultural Bank of Greece, majority owned by the state, closed down 13.8 percent.

The yield of the 10-year benchmark Greek government bond surged to 9.7 percent, yet another record since the inception of the euro. German and French yields fell, suggesting that investors were rushing out of riskier fixed-income assets into safer harbors.

The yield spread, or difference, between Greek and German 10-year bonds surged to 680 basis points, the highest since 1998. Yields on Portuguese and Irish bonds also surged, although those of Spanish bonds fell slightly.

Mr. Papademos’s unusually stern comments to the European Parliament are the latest expression of concern by the E.C.B. about the risks still embedded in the region’s economy even though most countries have emerged from recession


Jack Healy reported from New York. James Kanter contributed reporting from Brussels.



As Debt Fears Grow, Finance Ministers to Meet in Europe
By LANDON THOMAS Jr.
Copyright by Reuters
Published: April 28, 2010
http://www.nytimes.com/2010/04/29/business/global/29euro.html?hp


With Greece inching closer to the brink of financial collapse, fear that the debt crisis will spread rattled global markets for a second day on Wednesday as investors awaited a signal from financial leaders gathering in Berlin.

Shares slumped 1 to 2 percent across much of Europe and Asia, and the euro briefly fell to its lowest level in about a year against the dollar, as investors worried that Portugal, Spain and even Ireland might not be able to borrow the billions of dollars they need to finance their government spending.

Market sentiment began to steady in afternoon trading in Europe, with the FTSE 100 index in London turning positive.

Stocks in the United States opened higher. Sentiment was lifted by better-than-expected quarterly results from a wide array of companies, including Comcast, Corning, Northrop Grumman and Dow Chemical, The Associated Press reported.

Investors have grown increasingly nervous about the fate of Greece and other economies that use the euro. A recent proposal by European governments to extend a 45 billion euro loan to help Greece pay its bills, together with a smaller pledge by the International Monetary Fund, has done little to calm the markets. Germany’s statement this week that it must first see more deficit reduction from Greece before fulfilling its pledge has only increased concerns that Europe is not united behind Greece.

“It’s like Lehman Brothers and Bear Stearns,” said Philip Lane, a professor of international economics at Trinity College in Ireland, referring to the Wall Street failures that propelled the financial crisis of 2008. “It is not so much the fundamentals as it is the unwillingness of the market to fund you.”

“The situation is deteriorating rapidly, and it’s not clear who’s in a position to stop the Greeks from going into a default situation,” said Edward Yardeni, president of Yardeni Research. “That creates a spillover effect.”

In Lisbon, Prime Minister Jóse Sócrates said the government would begin this year some fiscal consolidation measures initially planned for 2011, Reuters reported. He made the comments after a meeting with an opposition leader, Pedro Passos Coelho. The Socialists will work with opposition Social Democrats to respond to “a speculative attack on the euro and Portuguese debt,” Mr. Socrates was quoted as saying.

The European Union’s president, Herman Van Rompuy, sought to calm nerves Wednesday, stating during a trip to Tokyo that Greece should be able to receive financial aid soon to help ease its burgeoning debt load and keep the euro zone stable.

The German finance minister, Wolfgang Schäuble, was meeting the head of the International Monetary Fund, Dominique Strauss-Kahn, and the European Central Bank president, Jean-Claude Trichet, in Berlin Wednesday on Greece’s request to free up an international bailout.

“I don’t want to hide behind a rosy picture. It’s not easy,” Mr. Strauss-Kahn said at a news conference afterward, Reuters reported. “Every day which is lost is where the situation is going worse and worse.”

German lawmakers told reporters after the I.M.F. briefing that Greece will receive much more aid than initially expected, between 100 and 120 billion euros over three years. Mr. Strauss-Kahn declined to comment on the report.

Earlier, the European Union President, Herman Van Rompuy, sought to calm nerves, stating during a trip to Tokyo that Greece should be able to receive financial aid soon to help ease its burgeoning debt load and keep the euro zone stable.

Later in the day, Mr. Strauss-Kahn was expected to join Chancellor Angela Merkel and heads of the World Bank, the World Trade Organization, the International Labor Organization and the Organization for Economic Cooperation and Development for a gathering that was previously scheduled but fortuitously timed to consider Greece’s increasingly dire situation.

Ángel Gurría, head of the O.E.C.D., said ahead of the meeting that the euro zone countries had to act “very fast.”

“It’s not a question of the danger of contagion,” he told Bloomberg television. “Contagion has already happened. This is like Ebola. When you realize you have it you have to cut your leg off in order to survive.”

The problem is that it is not just Greece, which expects to receive international aid, but Portugal, Spain and other countries that must issue more debt soon.

“The issue is rollover risk,” said Jonathan Tepper of Variant Perception, a research group based in London and known for its bearish views on Spain. “Spain has to issue new debt to the tune of 225 billion euros this year. Forty-five percent of their debt is held by foreigners. So they are dependent on the kindness of strangers.”

Stock markets in Europe began to tumble late Tuesday after Standard & Poor’s cut Greece’s debt to junk level, warning that bondholders could face losses of up to half of their holdings in a restructuring. The agency also downgraded Portugal’s debt by two notches.

On Wednesday, Greece’s securities market regulator banned all short-selling on the Athens stock exchange for the next two months as investors sold off Greek assets following the downgrade.

The Euro Stoxx 50 index, a barometer of euro zone blue chips, was down Wednesday more than 2 percent in early trading before recovering somewhat by midday; it dropped 3.7 percent on Tuesday.

In afternoon trading, the FTSE 100 in London was up 34 points, or 0.6 percent. The DAX in Frankfurt was down 10.05 points, or 0.2 percent, while the CAC-40 in Paris was flat.

Japan’s Nikkei index was down 2.6 percent, while the Hang Seng index in Hong Kong was down 1.5 percent Wednesday.

The euro fell to $1.3143 before bouncing back to $1.3237.

The yield on the 10-year Greek government bond narrowed to below 10 percent, having earlier surged through 11 percent, or more than three times the level of comparable German bonds. But it still closed higher on the day, alongside bonds of Portugal, Ireland, France, Italy and Spain.

Countries the world over sell bonds, which help cover the costs of things like social services and government workers’ pay. In developed countries, this debt is considered relatively safe because governments can raise taxes or fees to pay their debts. But government revenue has dropped sharply during the recession, and levying higher taxes risks further slowing the economy.

With European budget deficits worsening, investors are now worried that — like American homeowners who borrowed too much in the last decade — some countries may have a hard time paying off their debts.

As economic growth picks up, the financial pressure should ease. Officials from the Greek finance ministry and staff from the I.M.F. are racing to conclude aid for Greece by May 19, a crucial date for its refinancing efforts.

To some extent, Europe’s paralysis in dealing with Greece is driving the unease and highlighting political divisions within Europe. Each step toward additional support for Greece has appeared to be too little too late.

Kenneth Rogoff, a former economist for the I.M.F. who has studied sovereign defaults, calls the latest assistance package puzzling. “They put their wad on the table, but they could have gone further,” he said of the international plan. “I never thought Europe could take the lead on this.”

As the European Union and the I.M.F. debate the politics of Greece’s laying off civil servants or persuading its doctors to pay income tax, it is becoming apparent that the international community may need to come up with a much larger sum to backstop not just Greece, but also Portugal and Spain.

“The number would be huge,” said Piero Ghezzi, an economist at Barclays Capital. “Ninety billion euros for Greece, 40 billion for Portugal and 350 billion for Spain — now we are talking real money.”

Mr. Rogoff says that the I.M.F. could commit as much as $200 billion to aid Greece, Portugal and Spain, but acknowledges that sum alone would not be enough.

In fact, analysts at Goldman Sachs suggest that Greece will need 150 billion euros over a three-year period.

What a growing number of investors suggest is really needed is a “shock and awe” figure, enough to convince the markets that peripheral European economies will not be left to fail.

On Tuesday, a vice president of the European Central Bank said that the euro zone was facing its biggest challenge since the adoption of the Maastricht Treaty in 1997. Austerity measures in Greece and Portugal are already causing unrest there. Transportation workers in both countries protested on Tuesday, leaving train stations deserted because of strikes.

Officials from Standard & Poor’s said the main reason for downgrading the debt of Greece and Portugal was the prospect that forced austerity packages would be an even bigger drag on economic growth.

It is the most vicious of circles: stagnating economies are forced to cut back more, which reduces their ability to generate revenue and thus pay off their debts. As part of the euro zone, these countries do not have the ability to print their own money to stimulate growth and bolster exports, so increasing debt and an increasing prospect of default result.

Though they are under the most immediate pressure, Greece and Portugal are relatively small economies.

Given Spain’s size, its debt crisis is seen by many as the looming problem for world markets. On the surface, its debt load appears manageable. Its debt relative to gross domestic product, the broadest measure of its economy, is 54 percent — compared with 120 percent for Greece and 80 percent for Portugal.

But what Spain does have is the highest twin deficit, or combined budget and current account deficits, of any country in the world except Iceland, a reflection of how dependent it is on increasingly fickle foreign investors for financing. Spain has 225 billion euros in debt coming due this year — an amount that is about the size of Greece’s economy.

The base of investors willing to invest in the bonds of Spain and other distressed European countries is dwindling. Mohamed El-Erian, the chief executive of Pimco, one of the world’s largest bond investors, has said publicly that Pimco is no longer a buyer of Greek debt. Other Pimco executives have also said they have a negative view of the debt in countries on Europe’s periphery.

Given the losses that European investors have taken on Greek, Spanish and Portuguese bonds in recent months, it seems doubtful that such investors can be relied on to provide the capital these countries need.

Predicting where and when the next ripple will be felt is an inexact science. During the Asian crisis in 1997, Russia’s debt default took the world by surprise.

Some even worry that the next debt crisis may materialize in Britain or even the United States, where budget deficits and debt burdens are growing. Both countries are now issuing debt at reasonable levels of 4 percent. The long run of cheap financing may be coming to an end, though, even for the most creditworthy countries.


Jack Ewing contributed reporting from Frankfurt, Jack Healy from New York and David Jolly from Paris..