Europe shares hit by Portugal downgrade

By Naomi Tajitsu

LONDON (BestGrowthStock) – European shares fell on Wednesday and the euro sank to a 10-month low against the dollar after ratings agency Fitch downgraded Portugal, fuelling more concerns about the euro zone’s stability.

Euro zone government bond futures recovered early losses after Fitch cut its sovereign credit rating on Portugal by one notch to AA-, citing budgetary underperformance in 2009.

Ongoing speculation that Greece may have a difficult time securing debt aid at an upcoming European Union summit also highlighted problems facing the euro system, and helped to push the single currency to a lifetime low against the Swiss franc.

By 1116 GMT (7:16 a.m. EST), European shares were down 0.3 at 1,069.08, pulling back from 1,077.61 hit in early trade, its strongest since October 2008.

“The (stock) market was increasingly overbought so Portugal is a perfect excuse to book some profits,” said Kenneth Broux, market economist at Lloyds TSB in London.

The euro fell (Read more about the trembling euro. ) more than 1 percent on the day to $1.3345 according to Reuters data, hitting its weakest since May 2009 after the Fitch announcement.

Analysts said the euro’s weakness despite a stronger-than-expected reading of the Ifo Institute’s survey of German business sentiment suggested strong downward momentum in the common European currency.

The euro traded at 1.4280 Swiss francs, after sinking as low as 1.4232 on electronic trading platform EBS, its weakest since the single currency was launched in 1999.

The dollar index (Read more about the global trade. ) hit a 10-month high of 81.632 as the downgrade and jitters ahead of the EU summit prompted traders to sell currencies perceived to be higher risk for the safe-haven dollar, which also pushed it to a one-month high versus the yen. Diminishing risk appetite sent the MSCI world equity index

down 0.5 percent to 305.32, while U.S. crude oil prices fell 1.6 percent.

EU SUMMIT IN FOCUS

Market participants awaited the two-day EU summit beginning on Thursday to see what sort of assistance European nations offer to Athens, which is struggling to service its ballooning debts.

Some analysts say the euro may be vulnerable to more losses even if the two-day summit results in an assistance package for Greece, as the prospect of any IMF role in such aid may be seen as acknowledgement of weakness in the euro system.

“The uncertainty over an aid package for Greece is clouding judgment toward the euro. Even if the IMF comes in, it shows the EU is not able to help itself,” said Antje Praefcke, currency strategist at Commerzbank.

EU Monetary Affairs Commissioner Olli Rehn on Wednesday said the union must decide on a way to help debt-laden Greece this week, or run the risk of causing a “serious disruption” for the euro.

His comments came after Germany on Tuesday signaled for the first time that it may accept European financial aid for Greece as a last resort, but only if the IMF is involved and euro zone partners accept tougher budget discipline rules.

London’s FTSE index slipped 0.3 percent while sterling fell against the dollar ahead of the final UK budget before a national election expected in May.

Markets will watch the budget more for its effect on opinion polls than its economic measures, but there is still plenty of scope for stocks and government bonds to move on the detail of what is announced.

Stock Market Analysis

(Additional reporting by Neal Armstrong; Editing by Ruth Pitchford)

Europe shares hit by Portugal downgrade