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Europe's government debt crisis worsened ominously Tuesday when Greek bonds were downgraded to junk status and Portugal's debt was lowered on fears the trouble could spread. Stocks slid on the news.
German reluctance to fund most of a euro45 billion bailout of Greece by European government and the International Monetary Fund is sending shudders through markets that the money may not reach Greece by May 19, when euro8.5 billion in bond payments come due.
Germany wants to see a commitment to deep, long-term cutbacks in Greek government services and benefits before it agrees to provide its euro8.4 billion euro of the bailout cash. But investors remain highly skeptical that Greek voters used to generous benefits and worker protections will accept a drop in living standards. They also worry that the proposed bailout will not cure Greece's long-term imbalance between its soaring debt and tepid prospects of economic growth.
"The downgrade results from our updated assessment of the political, economic, and budgetary challenges that the Greek government faces in its efforts to put the public debt burden onto a sustained downward trajectory," said Standard & Poor's credit analyst Marko Mrsnik.
The move deprives Greece of an investment-grade rating on its bonds, meaning it would pay higher costs to borrow if it taps debt markets again. The agency said Greece's weak long-term growth prospects made it less credit-worthy.
"The Greek bond market is now in full scale meltdown," said Jeremy Batstone-Carr, head of private client research at stockbrokers Charles Stanley. "The nightmare scenario from an investor stand point is that either Greece defaults, forcing investors to take a severe 'haircut' on their investments-loans, or the Greek authorities could honor the country's debts and simply shut down all nonessential operations, markedly escalating the strife for the nation's people."
Default would hurt the shared euro currency and could lead to the debt crisis spreading to other countries with shaky finances such as Portugal and Spain, threatening them with the same vicious spiral of default fears leading to higher rates.
A debt downgrade immediately preceded Greece's call for the bailout last week. While Portugal has less debt, economists have focused on it as the next possible victim if concerns over high levels of government debt in Europe spread. Standard & Poor's downgraded its credit rating on Portugal amid mounting concerns about the country's ability to get a handle on its debt load, saying that the two-notch downgrade to A- reflects its view of "the amplified risks Portugal faces."
Greek company shares plunged for a fifth straight session Tuesday, with the benchmark Athens stock index shedding 6.75 percent to reach 1,683.08 points in late afternoon trading. The message from the markets is clear - there are real doubts that Athens will be able to service its debts.
"The market is pricing in the realistic prospect that Greece may not be in a position to meet all its debt obligations," said Jane Foley, research director at Forex.com.
Athens now faces a long, nail-biting wait with far from guaranteed results before its mid-May payment date.
"Until that day, everything must be concluded," Finance Minister George Papaconstantinou said. "I have absolutely no doubt that we will get there."
Prime Minister George Papandreou said his country stood "naked before international market storms."
"We are going through Greece's hardest time in recent decades," Papandreou told his Socialist party lawmakers. "The challenges our country faces are unprecedented, not only for Greece, but also for Europe and even the world economy. ... And what I say is no exaggeration."
This program aired on April 27, 2010. The audio for this program is not available.
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