Greek debt crisis eclipses all financial markets

Wall Street looked set to pause its sell-off, however, as investors await results from a Federal Reserve meeting later in the session.

But a day after ratings agency Standard & Poor’s downgraded Greek government debt to “junk” status, the 2-year Greek bond yield rose to 23 percent, 10-year yields more than 1,000 basis points above German ones, and Greece’s Capital Markets Commission banned stock short-selling.

“The chances of a default by the Greek government are increasing not by the day but by the hour. If the IMF and European governments don’t come up with something quickly, then I see the market going down further quite rapidly,” said Koen De Leus, economist at KBC Securities.

He said the Greek crisis was clouding everything else on financial markets.

“Investors are starting to react emotionally. In the current environment, it’s very difficult to impress with better-than-expected earnings,” he said.

World stocks as measured by MSCI were down 1 percent, a little off lows after losing more than 2 percent on Tuesday. The more volatile emerging market index lost 1.7 percent to add to declines of 1.4 percent in the previous session.

European shares dipped further after recording their biggest one-day fall in five months.

The FTSEurofirst 300 index of top European shares was down 1 percent. It tumbled 3.1 percent on Tuesday.

The crisis, which has been brewing for months but is now entering what Deutsche Bank has called a death spiral, prompted European Central Bank Executive Board member Juergen Stark to call for action by European governments.

“The onus is now on governments to ensure that the crisis that initially affected the financial sector, and subsequently the real economy, does not lead to a full-blown sovereign debt crisis,” he said.

ECB President Jean-Claude Trichet and IMF chief Dominique Strauss-Kahn will brief German political leaders on the latest plans to help Greece. They will hold a news conference at 1230 GMT and Chancellor Angela Merkel will follow with a statement at 1445 GMT.

Volatile euro

The euro, whose stability has been called into question by the crisis, hit a one-year low against the dollar in Asian trade after falling 1.5 percent on Tuesday.

It later steadied as currency traders took stock of the overnight moves and struggled to work out how to price in a currency from a monetary bloc that now includes junk-status debt.

It was at $1.3163, up 0.2 percent.

“This is all about the downgrades to Greece and Portugal. Without a solution to internal European problems then the euro downside will remain,” said Dag Muller, strategist at SEB in Stockholm.

He added the euro looked set to fall towards $1.29, although it was likely to see some short-covering and brief bounces.

In fixed income markets, the premium investors demand to hold Greek government bonds was at its highest since late 1996.

Traders reported attempts at forced selling by accounts that could not hold “junk” rated paper, although no trades were executed.

Portuguese/German 10-year government debt spreads widened to more than 320 basis points, a record for the euro’s lifetime.