World stock markets eye Berlin meeting as eurozone debt crisis intensifies

World markets eye Berlin as debt crisis escalates

LONDON — World stock markets recovered some of their poise Wednesday amid mounting hopes that the key actors in the Greek debt drama will finally get their act together and cobble together a rescue package that would give the country more bailout money for a longer period of time.

However, a downgrade of Spain’s debt by Standard & Poor’s two minutes before the main markets in Europe closed heaped late pressure on stocks and sent all of the major markets lower. Wall Street’s earlier advance was reversed too.

In Europe, Germany’s DAX closed down 75.17 points, or 1.2 percent, at 6,084.34 while France’s CAC-40 fell 57.60 points, or 1.5 percent to 3,787. Britain’s FTSE 100 index ended 16.91 points, or 0.3 percent, lower at 5,586.61.

Wall Street rebounded modestly following Tuesday’s dramatic declines though most of its early gains disappeared in the wake of the Spanish downgrade — the Dow Jones industrial average was up 9.59 points, or 0.1 percent, at 11,001.58, while the broader Standard & Poor’s 500 index 3.03 points, or 0.3 percent, at 1,186.74.

Hopes of an imminent deal helped the markets in Portugal and Greece recover from early big losses — in Lisbon, the PSI 20 index closed down 0.7 percent at 7,102.01 — earlier it had dropped 6 percent though.

Athens’ composite ASE index was relatively buoyant after the regulator banned short-selling of banking stocks for two months and expectations that Europe’s policymakers will finally rise up to the challenge — following five days of dramatic declines, the index ended 0.6 percent higher at 1,707.35.

The recovery in sentiment over the day came after brief comments in Berlin from German Chancellor Angela Merkel, International Monetary Fund managing director Dominique Strauss-Kahn and European Central Bank president Jean-Claude Trichet. They all suggested that bailout funds agreed to earlier this month will be released soon and that more may be in the offing.

Merkel has been widely blamed for prolonging the agony — many in the markets think that Tuesday’s plunge in world markets following Standard & Poor’s debt downgrades of both Greece and Portugal may have been the moment when she finally realized that time was of the essence and that Europe was heading for calamity if Greece’s crisis was not dealt with immediately.

“The markets will not wait for politicians,” said David Jones, chief market strategist at IG Index.

“All eyes are now on Germany to see if Angela Merkel will cut a deal with other eurozone leaders to release funds and extend further aid to Athens,”

Despite the bounce back from day lows in Europe’s stock markets, investors remain on tenterhooks to find out what the agreement is — there is growing talk that that the IMF may offer Greece more than the €10 billion it has already pledged and that the overall €45 billion package will be more than doubled.

There is also speculation that Greece will be given the funds for longer than one year, giving the country much-needed breathing space to get a handle on its debts and to convince the markets it is serious about dealing with them.

“Until such time as the market finds out whether President Trichet of the ECB has managed to knock some sense into Germany to support unequivocally a Greek financial bail out, markets remain uncomfortable, moribund and in some bond markets, particularly Greece’s, virtually illiquid,” said David Buik, markets analyst at BGC Partners.

The stakes are high and the potential for renewed selling remains as high as ever — evidenced by the announcement from Standard & Poor’s that it was downgrading its rating on Spain’s debt by one notch to AA from AA+.

It said the downgrade was due to its new forecast that Spain will suffer an “extended” period of subdued economic growth — S&P expects Spanish economic growth in the years to 2016 will only likely average around 0.7 percent a year against its previous expectation of above 1 percent annual growth.

“We now believe that the Spanish economy’s shift away from credit-fuelled economic growth is likely to result in a more protracted period of sluggish activity than we previously assumed,” Standard & Poor’s credit analyst Marko Mrsnik said.

Spain’s main market ended 2.2 percent lower at 1,107.53.

Inconclusive statements out of Berlin later could lead to another slide following Tuesday’s big descent after S&P downgraded Greece’s debt to junk status and cut Portugal’s rating as well. The agency’s decisions reinforced investor fears that Europe’s leaders were failing to get a handle on the government debt crisis afflicting Greece and that there is now a big chance of contagion with higher borrowing costs hitting other euro-using countries with weak finances.

“The longer the EU and the IMF vacillate and remain indecisive, the greater chance of some implosion,” said David Buik, markets analyst at BGC Partners.

The euro managed to find some respite after slumping to a one-year low of $1.3146 in the wake of the S&P downgrades but that was brought to an end following the Spanish downgrade — by late afternoon London time, the euro was down 0.1 percent at $1.3137.

Some distraction will likely emerge later when the U.S. Federal Reserve unveils its latest policy statement following the conclusion of its interest rate meeting — no change in the Fed funds rate is expected from the current 0-0.25 percent, nor in commitment to keep borrowing costs low for “an extended period.”

Earlier, Asian stocks tanked, with Japan’s Nikkei 225 stock average leading the region-wide retreat with a 2.6 percent fall to 10,924.79, while Hong Kong’s Hang Seng dropped 1.5 percent to 20,949.40 and South Korea’s Kospi was off 0.9 percent to 1,733.91. Shanghai closed down 0.3 percent.

The euro stabilized after a steep drop the day before to a near 1-year low before slipping again, trading down at $1.3153 from $1.3155. The dollar rose to 93.42 yen from 93.07 yen.

Oil prices rebounded modestly, with benchmark crude for May delivery up 49 cents at $82.93 a barrel.

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AP Business Writer Jeremiah Marquez in Hong Kong contributed to this report.