US: World markets firmer on hope for resolution of Greek crisis
European stock markets clambered off Tuesday's lows on hopes that key actors in the Greek debt crisis, particularly Germany, will make good on their commitment to provide Greece the money it needs to pay off creditors.
Investors will be watching press briefings in Berlin following meetings between German Chancellor Angela Merkel, International Monetary Fund managing director Dominique Strauss-Kahn and European Central Bank president Jean-Claude Trichet.
There is growing talk that the IMF may offer Greece more than the euro10 billion ($13.3 billion) it has already pledged and Merkel will be asked to act quickly to keep this crisis from leading to wide-scale government defaults, another banking crisis and a swift return to recession across the whole euro currency bloc.
The markets expect Merkel to commit to transfer its euro8.4 billion share of the euro45 billion bailout deal to Athens well in advance of the May 19 deadline, when Greece has around euro10 billion of debt repayments due.
As a result, stocks in Europe came off their earlier lows on Wednesday, while Wall Street futures pushed higher.
In Europe, the FTSE 100 index of leading British shares was down 19.49 points, or 0.4%, at 5,584.03 while Germany's DAX fell 77.01 points, or 1.3%, to 6,082.50. The CAC-40 in France fell 58.04 points, or 1.5%, to 3,786.56.
Earlier, Asian stocks tanked, with Japan's Nikkei 225 stock average leading the region-wide retreat with a 2.6% fall to 10,924.79. Wall Street was poised for a flat opening following Tuesday's big falls — Dow futures were up 6 points, or 0.1%, at 10,961 while the Standard & Poor's 500 futures rose 1.6 points, or 0.1%, at 1,182.60.
The biggest decline Wednesday was registered in Portugal, where the main PSI 20 index in Lisbon slid 3% to 6,937.39 — earlier it had dropped 6%.
Athens' composite ASE index was relatively buoyant after the regulator banned short-selling of banking stocks for two months and on expectations that Europe's policymakers will finally rise up to the challenge. Following five days of dramatic declines, the index was up 1.8% at 1,726.78.
Any further quibbling from the leaders could lead to another slide following Tuesday's big drop after Standard & Poor's downgraded Greece's debt rating to junk status and cut Portugal's two notches. The agency's decisions reinforced investor fears that Europe's leaders were failing to get a handle on the government debt crisis afflicting Greece and that there is now a big chance of contagion with higher borrowing costs hitting other euro-using countries with weak finances.
"The financial markets have responded appropriately to chaotic conditions in Greece and the pedestrian nature of the decision making process in Europe," said Jeremy Batstone-Carr, director of private client research at stockbrokers Charles Stanley.
"The real issue is contagion," says John Stoltzfus, senior market strategist at Ticonderoga Securities. "It raises a red flag. It represents the latest act in the unfolding drama that began in Greece."
On Wednesday, the Dow Jones industrial average, which has finished higher for eight consecutive weeks, fell back below 11,000, tumbling 213.04 points, or 1.9%, to 10,991.99. It was the Dow's worst drop since Feb. 4. The blue-chip gauge is still up 5.4% for the year and 67.9% since the March 9, 2009, bear-market low.
Investors fled to investments viewed as havens, such as U.S. Treasuries. The yield on the 10-year note, which moves in the opposite direction of price, fell to 3.69% Tuesday from 3.81% Monday. Gold shot up $17 an ounce to a 52-week high of $1,170.50. Cash also flowed into the U.S. dollar, causing the euro to plunge to a 12-month low vs. the greenback.
Interest rates jumped sharply again in both Greece and Portugal as investors demanded higher yields to lend money. The yield on Portugal's two-year note soared above 15% — a record, according to Stoltzfus. Higher borrowing costs make it even more difficult to service the high debt loads.
Some say the debt downgrades will pressure European authorities to finalize a bailout for Greece. "This will be addressed and the crisis will be contained to Europe," says Jim McDonald, chief investment strategist at Northern Trust.
For many in the markets, the euro area is now facing a real existential threat because the rules set up to support the euro have not prevented governments from spending their way into a crisis.
"The message is clear that the euro only works if all countries give up financial sovereignty and pool resources for common taxes, budgets and social security," said David Buik, markets analyst at BGC Partners.
"If these boxes are not all ticked the whole philosophy and ethos of a united Europe crumbles in to dust," he said.
Germany, where the bailout is unpopular with voters, has been slow in authorizing the release of the funds — its failure to do so stoked the panic in the markets, which has seen market rates on Greece's two-year bonds skyrocket to 21%.
"Jittery investors are concerned that the instability in the markets could snowball into something much bigger, and are hoping that real progress today may help to melt the ice," said Anthony Grech, market strategist at IG Index.
There's even talk now in the markets that the European Central Bank may have to play a more active role in resolving this crisis, especially as the policymakers in the European Union and the institutions have failed to provide a lead.
Many analysts think the European Central Bank may invoke emergency powers to buy Greek bonds, using the argument that the turmoil in Greece was threatening the stability of the euro area.
Even then, the consensus in the markets is that Greece will have to restructure its debts, by either cutting the amount it pays debtholders — Standard & Poor's warned on Tuesday they might get only 30-50% of their principal investment back — or by extending the terms of repayment.
The euro managed to find some respite after slumping to a one-year low of $1.3146 in the wake of the S&P downgrades — by early afternoon London time, the euro was up 0.4% at $1.3211.
Some distraction will likely emerge later when the U.S. Federal Reserve unveils its latest policy statement following the conclusion of its interest rate meeting.
Though no change in the Fed funds rate is expected from the current 0-0.25%, investors will be focusing in on the minutiae of the accompanying statement, particularly on whether there is an ongoing commitment to keep borrowing costs low for "an extended period."
Elsewhere in Asia, Hong Kong's Hang Seng dropped 1.5% to 20,949.40 and South Korea's Kospi was off 0.9% to 1,733.91. Markets in Australia and India retreated between 1% and 2%. Shanghai closed down 0.3%.
The euro stabilized after a steep drop the day before to a near 1-year low before slipping again, trading down at $1.3153 from $1.3155. The dollar rose to 93.42 yen from 93.07 yen.
Oil prices dropped for a second straight day, with benchmark crude for May delivery down 55 cents at $81.89 a barrel.
