ATHENS — Greece was pushed to the brink of a financial abyss and started dragging another eurozone country — Portugal — down with it Tuesday, fueling fears of a continent-wide debt meltdown.
Stocks around the world tanked when ratings agency Standard & Poor's downgraded Greek bonds to junk status and downgraded Portugese bonds two notches, showing investors that Greece's financial contagion is spreading.
Major European exchanges fell more than 2.5 percent, and on Wall Street, the Dow Jones industrial average finished down more than 200 points. The euro slid more than 1 percent to nearly an eight-month low.
"We have the makings of a market crisis here," Neil Mackinnon, global macro strategist at VTB Capital, said.
Greece is struggling with massive debt, and with prospects for economic growth weak, it could end up in default. Its 15 eurozone partners and the International Monetary Fund have tried to calm the markets with a $60 billion rescue package, but it hasn't worked.
Standard & Poor's warned that holders of Greek debt could take large losses in any restructuring, but a greater worry is that Greece's debt crisis is mushrooming to other debt-laden members of the eurozone. One bailout can be dealt with, but two will be stretching it, and there are fears that other weak economies could be pulled down in the Greek spiral — including Europe's fifth-largest, Spain.
The crisis threatens to undermine the euro and make it harder and more expensive for all eurozone governments to borrow money. It has also disrupted cooperation between eurozone governments, with Germany resisting the idea of bailing out Greece unless strict conditions are met.
Many investors think Greece will have enough money to avoid default in the coming weeks, but the future is cloudier. Both Standard & Poor's and the Greek finance ministry insisted that the country will have enough money to make the $11 billion bond payments due on May 19.
Even if it does, Greece faces years of austerity, with living standards sharply reduced. Standard & Poor's warned that its economy is unlikely to be as big as it was in 2008 for another decade.
Greek and Portuguese stocks were pounded — down 6.7 percent and 5.4 percent, respectively — while their market borrowing costs went through the roof. The interest rate for Greek two-year bonds jumped to 18 percent.
The interest rate gap, or spread, between Portugese and benchmark German 10-year bonds rose about half a percentage point Tuesday to reach its highest point since the euro came into circulation. The higher the gap, the less confidence in Portugal; its bonds on Tuesday had an interest rate 5.86 percentage points higher than German bonds.
Greece and Portugal responded with alarm at the downgrades.
Greek Finance Minister George Papaconstantinou said the downgrade "does not reflect the real state of our economy, nor the fiscal situation, nor the ongoing negotiations which have the very realistic prospects that they will be completed successfully in the next few days."