The financial crisis engulfing Greece and Portugal — and fears it could spread to other eurozone countries — overshadowed an expected meeting Wednesday between German Chancellor Angela Merkel and the heads of the International Monetary Fund and theEuropean Central Bank.
Worried markets are looking to Merkel, IMF managing director Dominique Strauss-Kahn and ECB President Jean-Claude Trichet and others to send a positive signal, a day after Greek bonds were downgraded to junk status and Portuguese bonds downgraded two notches.
Europe is facing a debt crisis in which investors fear governments, hit by the global economic turmoil of the past several years, will not be able to pay back what they have borrowed.
The crisis has undermined the shared euro currency and raised fears governments will have to pay more to borrow, hurting growth, crimping spending and pushing up taxes.
Greece now says it can’t pay upcoming debt without bailout loans. The worst fear is that other heavily indebted governments such as Spainand Italy will face the same vicious spiral, in which default fears lead to higher borrowing costs that in turn fuel default fears even more.
The crisis has been intensified by German delay in approving its part of the euro45 billion ($59.8 billion) from the 15 other countries that use the euro as well as the International Monetary Fund.
Germany, as Europe’s largest economy, would be the biggest single contributor with some euro8.4 billion in loans but is calling for parliamentary approval and strict conditions on the loans.
Stocks sagged and markets sold off Greek bonds with a vengeance as investors appeared to anticipateAthens would eventually have to default or restructure its debt payments even if the bailout gets it past a May 19 repayment date for some of its debt.
A key indicator of attitudes toward Greece — the interest rate gap, or spread between Greek 10-year bonds and the benchmark German equivalent — hit an astonishing 9.63 points, a massive jump from around 6.4 points on Tuesday. The higher the spread, the more investors think Greece might default.
That translates into borrowing costs at the moment of nearly 13 percent for a 10-year bond, more than four times what Germany, the benchmark for solidity, must pay.
Authorities in Athens halted short-selling of stocks for two months as the Athens stock exchange continued a six-day losing streak Wednesday, with the benchmark general index down 0.92 percent at 1,681.07 points in midday trading. The bourse took a hammering Tuesday, losing 6 percent.
The ban on short-selling of shares — in effect, betting they will go down — will remain in force until June 28.
German Finance Minister Wolfgang Schaeuble stressed in an interview with the Handelsblatt daily that despite the rhetoric and reluctance of the past few days, Germany remained committed to helping Greece.
“It is about making the aid package that we drew up on April 11 in the eurogroup more concrete and putting it into action, to send a clear signal that we will not let Greece fail,” Schaeuble said.
The debate is underscored by polls showing that many Germans feel aid to Greece is unwise. A poll by Dimap for German newspaper Die Welt and French broadcaster France 24 showed that 57 percent of Germans thought that providing such aid was a bad decision while just 33 percent favored such a move.
The poll was conducted earlier this month and surveyed 1,009 people. No margin of error was given.
Merkel faces an important election in Germany’s most populous state on May 9 and she is coming under pressure from within her own party, the conservative Christian Democratic Union, over her handling of the Greek issue.
In Athens, German lawmakers were meeting with Greek Finance Minister George Papaconstantinou, while some 200 people protested the government’s hiring freeze on civil servants.
Portuguese Prime Minister Jose Socrates, and the leader of the main opposition party were to hold emergency talks in Lisbon on steering the country out of its financial crisis as the Lisbon stock market plunged for a second day.
The Lisbon stock market fell 6.2 percent in early trading Wednesday, after dropping more than 5 percent the previous day.
