MercoPress. South Atlantic News Agency

Delayed Planned Bailout Forcing Greece Closer to Technical Default

Global markets dropped as borrowing costs for Greece soar

Shares across the globe fell sharply after German chancellor Angela Merkel said bond investors in Greece may have to take a hit even if a bail-out is agreed. With Merkel facing increased domestic opposition to the planned bailout and with elections imminent she has been talking tough, demanding Greece pay higher interest on any money it borrows than was originally agreed.

Equity markets have been shrugging off the escalating situation in Greece over recent days but Angela Merkel's comment Tuesday that bond investors may have to accept a lower than promised payout—a so-called a haircut—on their investment as part of an eventual solution has unsettled investors across markets. The Euro fell against the US dollar as many analysts say it is clear the Greek tragedy will lead to a restructuring of the Euro—even if a collapse of the single currency is avoided.

Simon Lewis, economist at Monument Securities points out this is not the first day that unilateral comments from German leaders have inflamed the Greek situation. “Market participants can hardly be blamed for having noticed how, time and time again, any chance that sentiment towards Greek sovereign debt might improve has immediately been crushed by statements from German policymakers,” he said. He believes German leaders are preparing for a review of the single currency.

Lewis said the latest statement on haircuts would provide: “a plausible mechanism for ejecting weaker members from the Eurozone. If 'haircuts', and the associated capital losses for holders, are to be a standard feature of bailouts for Eurozone member states, investors will be nervous of holding the sovereign debt of any member that could conceivably run into debt difficulties”.

All of which pushed the yield on Greek five and ten year bonds to new highs of 11.29% and 9.82% respectively. The cost of insuring Greek debt also soared as investors fear the risk of default is increasing by the minute. Increasingly, markets are worried that even if Greece can secure a loan to help it cover its debt obligations on May 19th, its costs of borrowing have climbed so high that the promised €45 billion bailout from the EU and the IMF won't be enough to see it through.

There are also increasingly doubts that Greece can meet the new tougher targets on debt reduction being demanded by European national lenders. Stock markets also took a hit with the FTSE 100 down 65.04 points, or 1.13%, to 5688.62 France's CAC 450 down 61.24 points or 1.53% to 3936.41 and Spain's IBEX down 2.14% at 10705.8.

Meantime, US stocks slid to session lows after the credit ratings of both Greece and Portugal were cut, escalating worries about their sovereign debt. The Goldman Sachs Senate hearings are also having an impact. The Dow Jones Industrial Average lost 213.04 points, or 1.9%, to 10,991.99. The Standard & Poor's 500 Index fell 28.34 points, or 2.34%, to 1,183.71. The NASDAQ Composite Index dropped 51.48 points, or 2.04%, to 2,471.47.

In Latinamerica, Brazil’s Bovespa was down 3.43%; Mexico’s ISP, 3.23%; Argentina’s Merval, 2.56% and Chile’s IPSA, 0.62%.