Debt rating cuts for Greece and Portugal sink global markets; Greek bonds now are branded junk
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Two European sovereign-debt crises have turned out to be one too many for global financial markets.
Stocks plunged in Europe and are sharply lower on Wall Street on Tuesday after Standard & Poor’s slashed Greece’s credit rating to junk status and also cut Portugal’s rating two notches. S&P also kept a negative outlook on the two countries’ ratings -- meaning more downgrades are possible in the near term.
S&P’s double punch drove the average European blue-chip stock down 3.1%, the biggest drop since Nov. 26. Stocks plummeted 6% in Greece, 4.7% in Portugal, 4.2% in Spain and 2.7% in Germany.
The euro currency slid to a one-year low of $1.318 from $1.338 on Monday.
In U.S. trading, the Dow industrials were down 145 points, or 1.3%, to 11,058 at about 11:45 a.m. PDT. As usual in times of turmoil, some investors took refuge in U.S. Treasury debt: The 10-year T-note yield slid to 3.69% from 3.81% on Monday. [Updated at 1:10 p.m. PDT: The Dow closed down 213.04 points, or 1.9%, to 10,991.99, its biggest one-day drop since Feb. 4.]
Most world markets had held up relatively well in recent weeks despite Greece’s worsening fiscal mess, but that just may have given some investors a better excuse to cash out Tuesday. U.S. stock indexes on Friday had hit 19-month highs.
S&P hacked Greece’s long-term debt rating to BB-plus from BBB-plus, marking the first time that a country in the euro-zone has dropped to junk, or non-investment-grade, status.
While European officials continue to negotiate the terms of a bailout for Greece, S&P opted not to wait for the plan. The ratings firm cited “uncertainties” about the Greek government’s “political resolve to embrace a fiscal austerity program of many years’ duration” to bring down its crushing debt burden.
As for Portugal -- also struggling under heavy debt and facing poor economic growth prospects -- S&P lowered its rating to A-minus from A-plus, citing “amplified fiscal risks.” Portugal, which so far hasn’t requested help from the rest of Europe, “could struggle to stabilize its relatively high debt ratio” until 2013, S&P said.
The ratings firm’s moves triggered another blistering sell-off in the government bonds of Europe’s weakest economies. The yield on two-year Greek bonds rocketed to 15.35% from 13.16% on Monday and 6.1% two weeks ago, a sure sign that the market believes Greece ultimately will seek to restructure its debt by cutting interest or principal payments, or both.
S&P said that if Greece restructures its debt, current bond owners may recover just 30% to 50% of their principal amount.
Portugal’s two-year note yield soared to 4.91% from 3.99% on Monday. Yields also jumped on shorter-term Spanish, Italian and Irish government bonds.
Win Thin, a currency strategist at Brown Bros. Harriman & Co. in New York, said S&P’s decision to cut Greece to junk was a “very aggressive move, but the rating agencies are clearly trying to play catch-up after missing the boat” on the worsening European debt situation.
-- Tom Petruno