The financial crisis engulfing Greece and Portugal and fears it could spread to other eurozone countries overshadowed an expected meeting Wednesday between German Chancellor Angela Merkel and the heads of the International Monetary Fund and the European Central Bank.
Worried markets are looking to Merkel, Dominique Strauss-Kahn, the head of the IMF; ECB President Jean-Claude Trichet and others to send a positive signal a day after Greek bonds were downgraded to junk status and Portuguese bonds downgraded two notches.
Europe is facing a debt crisis in which investors fear governments, hit by the global economic turmoil of the past several years, will not be able to pay off on their increasing debt loads. The fears have started with Greece, which now says it can’t pay upcoming debt without bailout loans, but Portugal was drawn in Tuesday when Standard & Poor’s ratings agency downgraded its credit rating as it lowered Greece’s rating to junk status.
Greece has asked for some euro45 billion ($59.8 billion) from the 16-nations that use the euro as well as the International Monetary Fund, and Germany, as Europe’s largest economy, would be the biggest single contributor with some euro8.4 billion in loans.
Debate over helping bailout Greece has heated up in Berlin, which is demanding that any aid to Athens be linked to strict conditions.
Stocks sagged and markets sold off Greek bonds with a vengeance as investors appeared to anticipate Athens would eventually have to default or restructure its debt payments at some point even if the bailout gets it past May 19, when it has debt coming due.
A key indicator of risk _ the interest rate gap, or spread between Greek 10-year bonds and the benchmark German equivalent _ hit an astonishing 9.63 points, a massive jump from around 6.4 points on Tuesday. It translates into borrowing costs at the moment of nearly 13 percent for a 10-year bond.
Authorities in Athens halted short-selling of stocks for two months as the Athens stock exchange continued a six-day losing streak on Wednesday, with the benchmark general index down 0.92 percent at 1,681.07 points in midday trading. The bourse took a hammering on Tuesday, losing 6 per cent.
The ban on short-selling of shares _ in effect, betting they will go down _ will remain in force until June 28.
Finance Minister Wolfgang Schaeuble stressed in an interview with the Handelsblatt daily that despite the rhetoric and reluctance of the past few days, Germany remained committed to helping Greece.
“It is about making the aid package that we drew up on April 11 in the eurogroup more concrete and putting it into action, to send a clear signal that we will not let Greece fail,” Mr Schaeuble said.
The debate is underscored by polls showing that many Germans feel any aid to Greece is unwarranted and an unwise decision.
A poll by Dimap, done on behalf of German newspaper Die Welt and French broadcaster France 24, showed that 57 per cent of Germans thought that providing such aid was a bad decision while just 33 per cent favoured such a move.
The poll was conducted earlier this month and surveyed 1,009 people. No margin of error was given.
Ms Merkel faces an important election in Germany’s most populous state on May 9 and she is coming under pressure from within her own party, the conservative Christian Democratic Union, over her handling of the Greek issue.
In Athens, German lawmakers were meeting with Greek Finance Minister George Papaconstantinou, while some 200 people protested the government’s hiring freeze on civil servants.
Demonstrators said they had passed a finance ministry exam last year, but would not get the jobs due to the freeze.
“Many of us have given up our previous jobs on the strength of the exam results,” said Iraklis Tzomiadis, 31. “You can guess what it’s like having to look for work right now.”
On Tuesday, Standard and Poors’ cut Greece sovereign debt to ’junk’ status and dropped Portugal’s down two notches.
The move “has sent the bond markets into meltdown and equity investors toward the exits, as risk aversion saw stock markets post their biggest one day declines in weeks,” said Michael Hewson, an analyst with CMC Markets in London.
He said that if others, including Moody’s and Fitch, were to follow suit, it could put tremendous pressure on Greece and likely hamper its ability to cover its day-to-day funding of operations with the European Central Bank in Frankfurt.
Portuguese Prime Minister Jose Socrates, and the leader of the main opposition party were to hold emergency talks in Lisbon on steering the country out of its financial crisis as the Lisbon stock market plunged for a second day.
The Lisbon stock market fell 6.2 percent in early trading Wednesday, after dropping more than 5 percent the previous day.