World Business

Is a wider bailout needed?

By Simon Kennedy and Emma Ross-Thomas (China Daily)
Updated: 2010-04-29 10:31

Bonds plunged as Standard & Poor's lowered its rating on Greece by three steps to 'BB+' from 'BBB+' and warned that investors could recover as little as 30 percent of their initial outlay if the country restructures its debt. The shift came minutes after the rating company reduced Portugal by two steps to 'A-' from 'A+'.

The moves exacerbated concern that Portugal and other nations trying to cut budgets will be left to fend for themselves by an EU that took two months to agree on a plan for Greece.

"The biggest risk now is that the market speculates against every single indebted peripheral country, and that could lead to a sovereign debt crisis," said Axel Botte, a fixed-income strategist at AXA Investment Managers in Paris. "The contagion risk is real."

Portuguese Finance Minister Fernando Teixeira dos Santos said on Tuesday his country must react to "attacks by markets".

The crisis is deepening as German lawmakers debate whether to put taxpayers' money at risk in the face of public opposition and an election in the state of North Rhine-Westphalia on May 9. Bild Zeitung, Germany's biggest-selling tabloid, on Tuesday ran a front-page headline asking: "Why do we have to pay Greece's luxury pensions?"

European Central Bank President Jean-Claude Trichet, declined to comment to reporters on the downgrades. Greece is struggling to convince investors it can push its shortfall below the EU's limit of 3 percent of gross domestic product from 13.6 percent last year.

The yield on the Greek two-year note rose 492 basis points to 23.9 percent on Wednesday, more than 20 times the comparable German bond and 10 percentage points more than similar-maturity notes from Pakistan.

Bloomberg News