Euro pays steep price for Greece contagion fears

By Daniel Bases

NEW YORK (BestGrowthStock) – The euro fell (Read more about the trembling euro. ) to a 14-month low and world stocks slumped on Wednesday as deadly protests against austerity measures in Athens revived fears that Greece’s struggle to repay its debts could engulf other European economies.

Moody’s warned Portugal’s debt could be downgraded but markets recovered some ground but ended weaker.

German bond yields fell on investor fears that a massive EU aid package for Greece would not be sufficient to maintain confidence in the policies of other fiscally weak euro-zone nations. U.S. Treasury prices drifted down from their highs but were still up on the day as investors sought a haven.

The euro lost 1.25 percent to $1.2818, its lowest rate since mid-March 2009, after losing about 3.5 percent against the greenback this week.

Skepticism that Greece can deliver on its promises of tough austerity measures dominated the markets. Athens vowed it would not retreat from its measures even if it incurs a heavy political price.

“The focus right now is primarily on how this is going to play out in Europe, how much damage is going to be done,” said Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co, in San Francisco.

“How this gets resolved will tell the rest of the euro countries that are under pressure, ‘Here are the parameters for help.'”

German bund yields hit a record low, while the cost of protecting Portuguese government debt against default hit a record high after credit rating agency Moody’s Investors Service said Portugal was on review for a possible downgrade.

U.S. stocks (Read more about the stock market today. ) were weaker on the contagion fear, taking little notice of a private sector report showing gains in the U.S. labor market for the first time since January 2008.

By the close of trade, the Dow Jones industrial average (.DJI: ) fell 59.94 points, or 0.55 percent, to 10,866.83. The Standard & Poor’s 500 Index (.SPX: ) lost 7.73 points, or 0.66 percent, to 1,165.87. The Nasdaq Composite Index (.IXIC: ) dropped 21.96 points, or 0.91 percent, to 2,402.29.

The FTSEurofirst 300 (.FTEU3: ) index of leading European shares pared losses slightly on strong results from market bellwethers like Societe Generale (SOGN.PA: ). The index however closed down 0.95 percent, near a nine-week low.


In Athens, striking public sector workers challenged Greece’s bailout-for-austerity deal. Three people were killed, including a pregnant woman, choked to death when protesters set an Athens bank ablaze.

Policymakers, including International Monetary Fund chief Dominique Strauss-Kahn and the European Central Bank’s Axel Weber, warned of the dangers of contagion to other high-debt euro zone nations.

German Chancellor Angela Merkel put it in stark terms if the rescue plan did not work.

“We’re at a fork in the road,” Merkel told German lawmakers. “This is about nothing less than the future of Europe, and with it the future of Germany in Europe.

Portuguese credit default swap (CDS) prices surged to 407 basis points from 344 basis points, according to CDS monitor CMA DataVision. The firm said the levels implied a default rate of 29.6 percent.

Greece’s CDS levels reached a record high of 850 basis points from 764.5 basis points at the New York close on Tuesday.

The two-year Schatz yield was spurred to a fresh record low of 0.569 percent. The Schatz, a short-dated euro zone government bond benchmark, was introduced in the early 1970s.

The 10-year Portuguese/German government bond yield spread widened to 310 basis points, a euro lifetime gap.

The equivalent Spanish spread widened to 136 bps, also a euro lifetime gap.

Investors bought the government bonds on the Greece fear factor, ignoring a report that said euro zone’s economic growth should be stronger in 2010 than previously thought.

The price on benchmark 10-year Treasury notes was up 8/32 for a yield of 3.56 percent, down from 3.60 percent late Tuesday.

“Fear is the dominant driver of this flight-to-quality,” said Jim Barnes, fixed income portfolio manager at National Penn Investors Trust Co. in Wyomissing, Pennsylvania.

World stocks as measured by MSCI (.MIWD00000PUS: ) fell 1.32 percent to their lowest since early March, while the more volatile emerging equities index (.MSCIEF: ) lost 2.17 percent.

Asian markets also weakened. Shanghai’s key index (.SSEC: ) slid as much as 2.0 percent to its lowest in seven months, suffering from Beijing’s weekend moves to tighten policy.

Japan’s markets have been closed this week, and are scheduled to reopen on Thursday.

Oil extended losses, falling $2.77, or 3.35 percent, to settle at $79.97 per barrel, a day after its steepest one-day percentage loss in three months, on rising inventories and a firm dollar.

Safe-haven buying sent spot gold prices higher. The precious metal gained $4.35 to $1,175.50 an ounce despite strength in the greenback.

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(Additional reporting by Leah Schnurr in New York, Carolyn Cohn, Neal Armstrong, George Matlock, Kirsten Donovan in London)

Euro pays steep price for Greece contagion fears