Yields on Greek bonds reach double digits as default fears mushroom

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Greece’s debt woes went from very bad to horrendous on Thursday, sending interest rates on short-term Greek government bonds into the double-digit range as investors recoiled.

Deepening fear of a new chapter in the global financial crisis -- fueled by government debt loads -- also rocked world markets, sending stocks lower across Europe and on Wall Street.

Investors fled the Greek bond market for a seventh straight day after the European Union estimated that the country’s budget deficit in 2009 was even bigger than expected -- 13.6% of gross domestic product instead of the previous estimate of 12.7%. The EU also said the overall budget deficit for euro-zone countries was 6.3% of GDP last year, more than twice what’s supposed to be the limit.

Moody’s Investors Service cut Greece’s debt rating to A3 from A2, and Goldman, Sachs & Co. economists in London warned of worse than that to come: In a report, they said Greece may decide to cut or delay payments to its bond investors as it negotiates a now seemingly inevitable bailout from the rest of Europe.

Any reduction or delay in debt payments would be a default, by any other name.

Stunned investors drove the annualized yield on two-year Greek bonds to 10.1% from 7.78% on Wednesday and 6.35% a week ago.

“These are textbook emerging market default fears being manifested in the bond markets,” said Win Thin, a currency strategist at Brown Bros. Harriman & Co.

Portugal, which also is struggling under a heavy debt load, saw the yield on its two-year government note jump to 2.84% from 2.38% on Wednesday.

“The fact that Portugal and, to a lesser extent, Spain are seeing selling pressures too suggests that this story is not going away anytime soon,” Thin said.

By contrast, two-year U.S. Treasury notes yield just 1%. The U.S., despite its own massive borrowing needs, continues to play the role of global haven for worried money.

In Europe, key stock indexes slid 3.9% in Greece, 2.2% in Spain, 2.7% in Portugal and 1% in Germany.

The Dow Jones industrial average was down 48 points, or 0.4%, to 11,077 at about 10:10 a.m. PDT, after three days of modest gains.

-- Tom Petruno