World stocks drop as Greek debt crisis intensifies

[April 20, 2010]  LONDON (AP) -- World markets slid Thursday amid mounting worries about a potential Greek debt default as the country's borrowing costs continue to go through the roof.

In Europe, the FTSE 100 index of leading British shares was down 67.15 points, or 1.2 percent, at 5,694.91 while Germany's DAX fell 75.65 points, or 1.2 percent, at 3,959.29. The CAC-40 in France was 67.71 points, or 1.7 percent, lower at 3,959.26.

Wall Street was also poised to open lower after sizable falls Wednesday in the wake of disappointing data showing that consumer credit in the U.S. fell by $11.5 billion in February and a suggestion from Thomas Hoenig, a rate-setter at the U.S. Federal Reserve, that borrowing costs should start rising soon -- Dow futures were down 43 points, or 0.4 percent, at 10,806 while the broader Standard & Poor's 500 futures fell 5.5 points, or 0.5 percent, at 1,173.50.

However, the main point of interest in the markets Thursday ahead of the European Central Bank rate decision is what is going on with Greek borrowing costs in the money markets -- earlier the spread between Greek and German 10-year bond yields widened to 4.4 percentage points earlier, its highest level since the euro was introduced in 1999. The higher the spread, the less confidence markets are showing in Greece's ability to pay.

Particularly worrying is that the spread between the Greek and German 2-year bonds swelled by a staggering 1.2 percentage points Thursday as investors demanded more interest just to hold Greek debt. Greek shares took another battering -- the benchmark ASE composite index was down around 5 percent.

Greece has returned to the forefront of investors' concerns this week with a vengeance, barely two weeks after the EU finally agreed to a backstop bailout mechanism for the debt-laden country, that would also involve the International Monetary Fund.

"With or without support from the EU the bottom line remains that after years of fiscal mismanagement the market has little confidence that Greece can swallow the necessity austerity measures and slash its budget deficit," said Jane Foley, research director at Forex.com.

"Investors continue to demand a growing risk premium to hold Greek paper and the government cannot afford to issue at these levels and simultaneously meet its deficit cutting targets," said Foley.

Reports that eurozone countries were haggling over what interest to charge Greece in the event of an emergency loan package and some evidence suggesting that depositors were taking their money out of the country's banks have not helped either.

The focus later will be what the European Central Bank's president Jean-Claude Trichet says with regard to Greece after the bank's expected decision to keep its main interest rate on hold at the record low of 1 percent.

In particular, investors will be looking to hear what Trichet says about changes to the bank's policies on lending to banks.

Last month, Trichet told the European Parliament last month that so-called collateral crisis measures will not be scrapped at the end of this year as originally planned -- that means that the Bank will continue to accept lower-rated government bonds as collateral from banks. That helps support demand for Greek bonds.

However, Trichet said there will be changes to the operation of the policy that will likely benefit the most highly rated countries like Germany and France.

Ostensibly, the move was widely considered to be a concession to Greece, whose credit rating has been slashed amid concerns it can't get a grip on its mountain of debt. However, the expectation in the markets is that the lower rated countries will have to pay a premium -- or haircut -- for continued access to the central bank credit.

"One suspects that in the current fragile environment, the ECB is unlikely to announce a program that would excessively penalize Greece and other peripheral issuers," said Daragh Maher, an analyst at Credit Agricole.

"Instead, the process is likely to emphasize the continued eligibility of lower rated debt for collateral, with the haircuts not especially onerous," he added.

Trichet will likely also be quizzed about the euro, which fell another 0.2 percent to $1.3310.

Earlier in Asia, Japan's benchmark Nikkei 225 stock average fell 124.63 points, or 1.1 percent, to 11,168.20 while Indonesia dropped 1.4 percent, Malaysia slid 0.9 percent and Singapore declined 0.6 percent.

China's benchmark index in Shanghai fell 0.9 percent and Hong Kong's index was little changed.

Thailand's stock market plunged 2.6 percent following the government's declaration of a state of emergency after anti-government protesters stormed parliament demanding fresh elections.

South Korea's Kospi index gained 0.4 percent to 1,733.78.

Benchmark crude for May delivery was down 43 cents to $85.45 a barrel.

[Associated Press; By PAN PYLAS]

Associated Press writer Alex Kennedy in Singapore contributed to this report.

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