By Carl Mortished and David Wighton | Times Online | Apr. 29, 2010
Greece plunged deeper into financial turmoil last night after its government bonds were rated as junk by financial markets. The Portuguese government debt also took a hammering after panic spread that a Mediterranean virus of insolvency and bad debts would infect the rest of Europe.
Doubts are being openly expressed that a €30 billion (£26 billion) rescue package supported by Greece’s eurozone partners will be enough to tide the country over.
Norbert Barthle, a budget spokesman for Germany’s ruling party, made the financial mayhem worse yesterday when he said that banks holding Greek bonds might need to accept less than full repayment.
“Whoever bought Greek bonds wouldn’t get 100 per cent of their value but, say, only 80, 90 or 70 per cent — it depends,” he said.
The decision by the leading credit rating agency Standard & Poor’s to cut Greek debt to junk and reduce the sovereign rating for Portugal sent investors scurrying to the safer havens of UK gilts, German bunds and US Treasury bills.
The threat of a “haircut” for investors in eurozone bonds caused stock markets to fall across the world.
The euro continued its slide against the dollar but steadied after its fall against sterling on Monday. The London share market dropped 2.61 per cent, or 150 points, to 5603.52 and the Dow Jones industrial average was off 212 points at 10,992. Markets in Frankfurt and Paris also plunged.
The financial turmoil began on Monday when bond investors hammered Greece, forcing up the cost of short-term borrowing for the debt-strapped nation to 14 per cent.
Eurozone leaders have called an emergency summit on May 10 in the hope of approving a rescue package. Last night it was reported that the International Monetary Fund was prepared to put in another €10 billion.
Greece needs to repay €8.5 billion of maturing bonds on May 19. George Papaconstantinou, the Greek Finance Minister, said yesterday that the country could no longer afford to borrow.
Greece faces a formidable obstacle to rescue cash. Angela Merkel, the German Chancellor, has promised to join the rescue only if Athens makes budget cuts lasting several years.
German public opinion, however, is set against the rescue package, of which Germany would pay €8.5 billion. “People in Germany ... worry that we will have to pay for a long time for Greece,” Klaus Abberger, an economist at the German Ifo Institute, said.
A temporary exit from the eurozone was mooted as a solution by the German Free Democratic Party, the liberal coalition partners of Ms Merkel’s Christian Democrats. This could offer Greece a partial reprieve if a devalued currency boosted the Greek economy and helped to avoid mass unemployment, Ben May, an economist at Capital Economics, said.
He added: “Exiting the euro temporarily is not going to solve all their problems. They need to make structural adjustments that ensure competitiveness isn’t lost when they rejoin.”