Greek, Portugal debt fears stalk European markets as euro slides to ten-month dollar low

Greek, Portugal debt fears stalk European markets

LONDON — European stock markets recovered Wednesday to end up little changed while the euro slid to a fresh ten-month dollar low amid concern over whether the International Monetary Fund will be called in to bail out Greece. Portugal’s debt was downgraded, adding to concerns about the government debt woes afflicting Europe.

In Europe, the FTSE 100 index of leading British closed up 4.25 points, or 0.1 percent at 5,677.88 while Germany’s DAX rose 21.73 points, or 0.4 percent, at 6,039. The CAC-40 in France ended 2.74 points, or 0.1 percent, lower at 3,949.81.

Wall Street traded lower too — the Dow Jones industrial average was down 27.66 points, or 0.3 percent, at 10,861.17 around midday New York time while the broader Standard & Poor’s 500 index fell 3.81 points, or 0.3 percent, at 1,170.36.

European stocks had started the day off fairly brightly following expected further gains on Wall Street and a general advance in Asia earlier, but the ongoing debt problems afflicting Greece and Portugal saw the advance evaporate — investors are worried that the European debt crisis is mushrooming and exposing the institutional weaknesses behind the whole euro experiment.

Unsurprisingly, the euro was the main casualty — by late afternoon London time, the currency of 16 European countries was 1.1 percent lower at $1.3345, having earlier fallen to $1.3335, its lowest level since last May.

Investors waited to see whether the Washington, DC-based IMF will get involved in any financial rescue package that may emerge for Greece, given the reluctance of the German government to lead any bailout proposal. Markets were unsettled by uncertainty over what would come out of an EU summit Thursday, while IMF help would be a glaring admission the eurozone cannot steer out of the crisis with the rules currently at its disposal.

“For Greece this means that funds can be achieved at cheaper price than on the open market; for the EU it means suffering the indignity of having to admit that it does not have an adequate system in place to deal with fiscally errant members,” said Jane Foley, research director at Forex.com.

“The failure of the key members to agree on how to deal with Greece highlights just how inadequate the monetary union’s system of fiscal controls are,” Foley added.

To make matters worse, Fitch Ratings downgraded its view on Portugal’s sovereign debt because it said Portugal’s prospects for recovery are weaker than its peers in the eurozone. Though Portugal’s debt rating was reduced by one notch to AA-, the country is still considered investment grade and a better bet than Greece for now.

Fitch said the Portuguese government has to implement “sizeable” budget measures to meet its target of getting its deficit to 3 percent of national output by 2013.

The markets were left were also focusing in on the pre-election budget statement from the British government.

Though finance minister Alistair Darling said borrowing over the coming few years would be slightly lower than anticipated, most observers think that whoever wins the anticipated general election on May 6 will have to announce a raft of measures to bring the deficit down.

“Further decisive action to put the public finances back into a sustainable position will still be needed after the election,” said Jonathan Loynes, chief European economist at Capital Economics.

With investors continuing to fret about the state of the British public finances, the British pound tumbled, trading 1 percent lower at $1.4886.

Earlier in Asia, Japan’s Nikkei 225 stock average rose 40.88 points, or 0.4 percent, to 10,815.03 and Hong Kong’s main index added 40.88 points, or 0.4 percent, to 21,008.62 and Shanghai’s market climbed 0.1 percent to 3,056.81.

Markets in Australia and Taiwan also advanced moderately, while South Korea’s Kospi was off 0.1 percent.

Oil prices drifted lower, with benchmark crude for May delivery down $1.21 at $80.70.