World markets continued to fall on Wednesday as investors feared Greece may default on its debt and drag other euro zone countries in its wake.
REUTERS - Greece's exploding debt crisis eclipsed all else on financial markets on Wednesday, knocking global stocks down hard and pushing the euro for a time to a one-year low against the dollar.
A day after ratings agency Standard & Poor's downgraded Greek government debt to "junk" status, the 2-year Greek bond yield rose to 23 percent, 10-year yields more than 1,000 basis points above German ones, and Greece's Capital Markets Commission banned stock short-selling.
"The chances of a default by the Greek government are increasing not by the day but by the hour. If the IMF and European governments don't come up with something quickly, then I see the market going down further quite rapidly," said Koen De Leus, economist at KBC Securities.
He said the Greek crisis was clouding everything else on financial markets.
"Investors are starting to react emotionally. In the current environment, it's very difficult to impress with better-than-expected earnings," he said.
World stocks as measured by MSCI were down 1.3 percent, having lost more than 2 percent on Tuesday. The more volatile emerging market index lost 1.8 percent to add to 1.4 percent in the previous session.
European shares continued to dive after recording their biggest one-day fall in five months.
The FTSEurofirst 300 index of top European shares was down 1.5 percent. It tumbled 3.1 percent on Tuesday.
The crisis, which has been brewing for months but is now entering what Deutsche Bank has called a death spiral, prompted European Central Bank Executive Board member Juergen Stark to call for action by European governments.
"The onus is now on governments to ensure that the crisis that initially affected the financial sector, and subsequently the real economy, does not lead to a full-blown sovereign debt crisis," he said.
ECB President Jean-Claude Trichet and IMF chief Dominique Strauss-Kahn will brief German political leaders on the latest plans to help Greece. They will hold a news conference at 1300 GMT and Chancellor Angela Merkel will follow with a statement at 1445 GMT.
The euro, whose stability has been brought into question by the crisis, hit a one-year low against the dollar in Asian trade after falling 1.5 percent on Tuesday.
It later steadied as currency traders took stock of the overnight moves and struggle to work out how to price in a currency from a monetary bloc that now includes junk status.
It was at $1.3190 by 1000 GMT.
"This is all about the downgrades to Greece and Portugal. Without a solution to internal European problems then the euro downside will remain," said Dag Muller, strategist at SEB in Stockholm.
He added the euro looked set to fall towards $1.29, although it was likely to see some short-covering and brief bounces.
In fixed income markets, the premium investors demand to hold Greek government bonds was at its highest since late 1996.
Traders reported attempts at forced selling by accounts that could not hold "junk" rated paper, although no trades were executed.
Portuguese/German 10-year government debt spreads widened to more than 320 basis points, a record for the euro's lifetime.
Date created : 2010-04-28