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Fears of Greek default send markets down globally

ATHENS, Greece — On a day when angry Greek unionists took to the streets to protest harsh austerity measures imposed under an international bailout to save Greece from looming bankruptcy, stocks plunged around the world. On Tuesday, fears spread that Europe's attempt to contain Greece's debt crisis by providing $144 billion in loans would fail. The euro fell to its lowest point against the dollar in a year.

"Despite the large size of the loan package, there are growing worries that it will be insufficient to cover Greece's funding requirements over the next three years," said analyst Mitul Kotecha at Credit Agricole CIB Research. "All of this implies that the euro will remain vulnerable for some time yet."

"Concerns about parliamentary approvals, implementation-execution risk, prospects for relatively weaker growth in Europe, as well as contagion to Spain and Portugal, has tempered any enthusiasm towards the package," Kotecha said.

A Greek default would be a serious blow to the shared euro currency and inflict losses on banks holding Greek bonds in France and Germany. The bailout is intended to reassure markets Greece will not default and thus prevent the debt crisis from spreading to other financially shaky countries such as Spain and Portugal.

On Tuesday, the interest rate gap, or spread, between Portuguese and benchmark German 10-year bonds rose 30 basis points, or 0.3 percentage points, which means Lisbon would have to pay 5.4 percent in interest to borrow on the markets. By comparison, Greece would currently have to pay a prohibitive 9.5 percent — so much that the country was effectively shut off from the bond market.

Stocks in Athens, Lisbon and Madrid plunged Tuesday. Greek shares closed 6.7 percent down, Portuguese lost 4.2 percent and Spanish shed 5.4 percent. In the United States, the Dow Jones Industrial Average closed down 2 percent, while broader markets also fell significantly.

EU spokesman Amadeu Altafaj Tardio said the funds will be available on time, despite the complexities involved in 15 countries having to approve the deal. "I can assure you we will be ready to meet the commitments on Greece," he said.

"With the joint euro-zone-IMF fiscal lifeline increasingly likely to be in place in a matter of days, the possibility of a near-term Greek funding crisis has been greatly reduced," said Ben May, economist at Capital Economics Ltd. "But with government debt set to soar to astronomical levels, this may just mark the end of one act in the tragedy."

Meanwhile, about 4,000 striking teachers and students marched in Athens to protest austerity measures, carrying black flags, while some scuffled with police. Earlier, about 100 Communist Party supporters broke through the gates of the Acropolis, the city's chief ancient monument, and hung banners in Greek and English reading, "Peoples of Europe rise up."

The new Greek measures will cut deeper into pay for the country's estimated 750,000 civil servants, reduce all pensions and further hike consumer taxes.

Terrible Tuesday

Percentage losses in some major global stock markets Tuesday:

United States (Dow)– 2.0 percent
Greece– 6.7 percent
Spain– 5.4 percent
Portugal– 4.2 percent
France– 3.6 percent
Britain– 2.6 percent
Germany– 2.6 percent

Fears of Greek default send markets down globally 05/04/10 [Last modified: Wednesday, May 5, 2010 8:47am]
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