Fears about debt in Greece, Spain shake up stock markets

By Pan Pylas
Associated Press / May 24, 2011

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LONDON — Europe’s debt crisis returned to shake the markets yesterday. Fears about the solvency of Greece combined with concerns that Spain, or even Italy, may be dragged into the turmoil that has already led to bailouts of three euro countries.

Stocks and the euro tanked on a toxic brew of credit rating downgrades, a heavy electoral defeat for Spain’s governing party, and disagreements among European officials on how to deal with the crisis. Most of Europe’s stock markets ended over 1 percent lower yesterday; in the United States, the Dow Jones average fell as much as 180 points before paring its losses.

“It was a bad weekend for the eurozone and in particular for those politicians and financial authorities trying desperately to keep the euro project together,’’ said Jeremy Batstone-Carr, at Charles Stanley.

Investors watched last week as policy makers clashed over how to deal with Greece’s mountain of debt. Policy makers at the European Central Bank warned there would be catastrophic effects if Greece’s debt is restructured, but officials in Brussels suggested a delay in bond repayments could help give Greece more time to regain market trust.

The Fitch Ratings agency on Friday downgraded Greece further, below junk status, and yesterday cut Belgium’s outlook; Standard & Poor’s lowered Italy’s rating outlook over the weekend. Tensions were further heightened Sunday when Spain’s governing Socialists took a battering at regional polls as voters protested austerity measures when one in five people are looking for work. The epicenter of the market tensions, however, was Greece, analysts said.

After repeated warnings that Greece is behind schedule on its austerity reforms, some investors worry the country may not get its next bailout installment — which it needs to avoid default — from its eurozone partners and the International Monetary Fund.

Though Greece managed to get a $154 billion financial lifeline just over a year ago, the consensus in the markets is that it will have to get a second bailout in the next few weeks if it is to avoid some sort of default on its debt.

Prime Minister George Papandreou conceded as much over the weekend when he said the country was unlikely to be able to tap bond market investors next year. Yet last year’s three-year package of loans was predicated on Greece’s being able to do just that.

The view in the markets is that Greece will get more aid, partly because not doing so may cause an even bigger crisis and further threaten the euro currency.

After Greece, the next big concern is Spain; its economy is the eurozone’s fourth-biggest, and having to rescue it could sink Europe’s bailout fund.