World stock markets have fallen sharply after Greece’s credit rating was downgraded to junk status by rating agency Standard & Poor’s. Share prices in Asia were down early on Wednesday following Wall Street’s overnight plunge to its biggest loss in almost three months after Greece became the first member of the eurozone to have its debt lowered to such a level.
Australia has so far been shielded from the Greek financial crisis, the Reserve Bank of Australia (RBA) assistant governor Guy Debelle says as reported in The Australian But the assistant governor warned that while the crisis hadn’t yet affected nations outside the Eurozone, it may do so if market conditions deteriorate.
The downgrade of Greece’s credit rating means certain categories of investors, such as pension funds and insurance companies, may no longer be allowed to buy the country’s debt. Portugal’s debt was also downgraded on Tuesday, leading to fears the crisis could spread beyond the two countries and further undermine the euro currency.
Greece has requested $52 billion (USD) from eurozone governments and the IMF to shore up its finances but the reluctance of Germany, the largest country using the euro, to move quickly in providing assistance has sent shudders through markets.
Investors fear the money may not reach Greece to enable it to avoid default by May 19, when $12 billion in bond payments becomes due. With the clock ticking, leaders of Greece’s 15 euro currency partners are planning a summit on May 10 in a bid to agree on the rescue loan, a source close to the Spanish EU presidency told the AFP news agency.
“Intensive dialogue is under way between heads of state and government to call a summit of euro countries at the level of leaders on May 10,” for only the second time in the euro’s history, the source said as reported in Al Jazeera and other media reports.
The German government, which is the largest single contributor to the bailout package with an $11.2 (USD) billion loan, is reluctant to vote on the deal until after May 9 elections in the country’s most populous state – North Rhine-Westphalia.
As a result, the meeting in Brussels will take place the day after the election. A governmental source in Berlin it was reported in Rueters that IMF-EU negotiations in Athens would conclude on May 2, with the proposals to be debated in the Greek parliament ahead of the May 10 talks in the Belgian capital. Japan’s benchmark Nikkei share average was down 2.47 per cent in morning trade on Wednesday, while Hong Kong’s Hang Seng and South Korea’s Kospi were both lower by more than one per cent.
On Wall Street, the Dow Jones industrial average fell 213 points, or 1.9 per cent, to 10,991.99 on Tuesday, its biggest drop since it fell 268.37 points on February 4, also amid concerns about European debt problems. Greece and Portugal have imposed budget cutbacks against political resistance from unions at home. But markets have been sceptical that they can push through the measures given the widespread opposition.
The ratings downgrades also sent the US dollar up more than 1.1 per cent against the euro, hitting its highest level in about a year. At the same time, gold and treasury prices also rose as investors sought safer investments. Brian Peardon, a wealth adviser at Harrison Financial Group, said the markets’ response was “a knee-jerk reaction” as repored in Al Jazeera.
The small size of Greece’s and Portugal’s economies means their debt struggles are not yet a major problem, he said. But if they were to default on their debt, other countries that hold their bonds would also suffer, and debt-strapped countries would also likely find it harder to spend more to stimulate their economies and help feed the global economic recovery.
Giorgos Petalotis, a Greek government spokesman, said as reported on AP: “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,” Fernando 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,” he said.
