August 7, 2022

Uncertainty Over Greece Weighs on Financial Markets

Stocks on Wall Street were mixed in early trading on Thursday. Shortly after the opening, the Dow Jones industrial average was slightly higher, by about 12.41 points. The Dow had closed down 1.5 percent, at 11,897.27 points, on Wednesday as concerns about Greece were compounded by new fears about the pace of the United States economic recovery.

In early trading, the Standard Poor’s 500-stock index was up by 1.44 points, while the Nasdaq composite index fell 3.17 points. Both had closed down more than 1.7 percent on Wednesday.

The euro slipped, Asian and European stocks faltered and the yield on bonds of the more indebted European nations climbed.

Spain sold $4 billion of bonds at an auction Thursday, missing its top target and with average yields creeping upward again.

In Greece, Prime Minister George Papandreou said he would reshuffle his Cabinet and request a vote of confidence in Parliament after talks with the opposition about a unity government foundered.

With just a five-seat majority in Parliament, Mr. Papandreou has been struggling to get his government behind additional austerity measures demanded by its foreign creditors, and to contain growing rifts within his party

Meantime, there remained no agreement among Greece’s euro-area partners over a second emergency loan package. Talks have stalled over the extent to which private bondholders should share the burden in any new rescue.

In a statement Thursday, however, the European Union’s commissioner for economic affairs, Olli Rehn, said that he expected euro-zone finance ministers to sign off on the payout of 12 billion euros ($17 billion) for Greece from the original bailout on Sunday, and to decide on a second bailout in early July as well as the extent of private sector involvement.

“This two-step approach,” he said, “means that the funding of the Greek sovereign debt can now be ensured until September, while we take the decisions for the medium-term, beyond September, in July.”

Mr. Rehn added that he expected the Greek Parliament to agree new austerity measures.

Germany’s insistence on the role of private investors in the next bailout has contrasted with that of France and the European Central Bank, which are backing a position that would be less punishing to bondholders. On Thursday, President Nicolas Sarkozy of France called for a sense of “responsibility” and “compromise” on the issue.

“Everyone in every corner of global financial markets should be keeping a very close eye on upcoming Greek events,” the Deutsche Bank strategists Jim Reid and Colin Tan said in a research note, “The period is resembling the build-up to the Lehman collapse where, although markets were increasingly nervous, virtually everyone expected a last-minute buyer.”

“The only way to arrest the slide is if everyone backs down from their current position or if one side backs down significantly,” the analysts added. “The risks are building as the situation gets ever more difficult.”

China, which has purchased billions of euros in European debt and recently signaled its willingness to buy more, reaffirmed its support Thursday ahead of a visit next week by Prime Minister Wen Jiabao to Hungary, Germany and Britain.

“We hope Greece can realize stability and development through cooperation with the E.U. and the international community,” a foreign ministry spokesman, Hong Lei, was quoted as saying by The Associated Press in Beijing.

The febrile mood in the markets was accentuated by comments late Wednesday from the Irish Finance Minister, Michael Noonan.

He said that Dublin was ready to impose losses on senior unsecured bond holders of Anglo Irish Bank and Irish Nationwide Building Society if the European Central Bank agreed. His comments came after a meeting with the International Monetary Fund, which, he said, understood his position.

The remarks added to negative sentiment surrounding the financial sector following the announcement Wednesday of a review by Moody’s Investors Service of major French banks in the light of their exposure to Greece.

The financial services component of the Euro Stoxx 600 index was down 1.7 percent at midday Thursday. The CAC-40 index in Paris was down 1.1 percent, while the broader Euro Stoxx 50 index of blue chips shed 0.8 percent.

That followed drops in Asian markets, including 1.9 percent in Australia and South Korea and 1.8 percent for the Hang Seng index in Hong Kong.

The Nikkei 225 in Japan sagged 1.7 percent, the Taiex in Taiwan dropped 2 percent and stocks in mainland China fell 1.5 percent.

“There has been a complete loss of confidence,” said Francis Lun, managing director at Lyncean Holdings in Hong Kong. “With Greece on the verge of default, there are now fears that there will be a wider financial crisis.”

The euro was trading at $1.4117 Thursday, down from $1.4180 late Wednesday. Yields on benchmark Spanish, Greek, Portuguese and Italian government bonds climbed, while yields on safer German and British bonds fell.

Christine Hauser contributed reporting from New York, Bettina Wassener from Hong Kong and Stephen Castle from Brussels.

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