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April 28, 2010

Stocks, Euro Plunge as Treasuries Gain on Greece, Portugal Debt

By Michael P. Regan

April 28 (Bloomberg) — Stocks worldwide tumbled, with the Standard & Poor’s 500 Index falling the most since February, and the dollar and Treasuries rose as credit-rating downgrades of Greece and Portugal fueled concern debt-laden nations are moving closer to default. Greek, Portuguese and Irish bonds sank.

The MSCI Asia Pacific Index declined 1.4 percent at 9:30 a.m. in Tokyo. The S&P 500 lost 2.3 percent yesterday in New York. The Stoxx Europe 600 Index slid 3.1 percent, the most since November, and the euro dropped below $1.32 for the first time since April 2009. Yields on 10-year Treasuries tumbled 12 basis points to 3.68 percent. Greek two-year note yields soared to almost 19 percent and Portugal’s jumped to 5.7 percent as credit-default swaps on Europe debt surged to a record. Oil sank 2.1 percent, while gold rallied 0.7 percent.

S&P lowered Greek debt to junk and Portugal was cut two steps as contagion from Greece’s debt crisis spreads through the euro region. The downgrades come as German officials insist Greece must outline further steps to cut its budget deficit before they will endorse the release of funds from a 45 billion euro ($60 billion) rescue package. Financial shares led U.S. stocks lower as the Senate’s interrogation of Goldman Sachs Group Inc. executives spurred concern of tighter regulation.

“It’s the fear that Greece or Portugal may affect other areas of Europe and derail this economic recovery,” said Burt White, chief investment officer at LPL Financial in Boston, which oversees $379 billion. “There’s now a perception that we might see Greece or Portugal failing. If that happens, we may see more headwinds.”

Goldman Hearings

The ratings downgrades for Greece and Portugal were a one- two punch for securities markets distracted by the congressional testimony of Goldman Sachs executives in Washington. U.S. trading volume slipped while Fabrice Tourre, an executive director at the New York-based firm, read a prepared statement on his role marketing a collateralized debt obligation, then surged after the headlines on Greece were released.

U.S. senators probed the bank’s mortgage business with Senator Carl Levin asked why it sold a set of investments the lender had itself labeled “shitty.”

“What’s punctuating the downside of the market is the tense exchange between the Goldman Sachs executives and Carl Levin and other legislators,” said Matthew Kaufler, a money manager at Federated Clover Investment Advisors in Rochester, New York, which manages $3 billion. “From Wall Street’s perspective, the timing couldn’t be worse because it raises the specter of financial reform being pushed through with perhaps sharper teeth than it otherwise would have had.”

Goldman Rises

Goldman Sachs shares rose 0.7 percent, posting the only gain among 79 companies in the S&P 500 Financial Index. Goldman Sachs has still lost 17 percent since the Securities and Exchange Commission sued the company for fraud on April 16.

“The damage is already built into the stock price,” said Jason Weisberg, director of institutional trading at Seaport Securities Corp. on the floor of the New York Stock Exchange. “Their ability to make money is unprecedented and if the rules change they’ll figure out a new way to do it.”

Greece’s benchmark ASE equity index tumbled 6 percent to a one-year low. The market in Athens closed before S&P cut the nation’s rating. Portugal’s PSI-20 Index slumped 5.4 percent, the most since October 2008, and Ireland’s ISEQ Overall Index declined 4.5 percent, the biggest decline since October 2009. Spain’s IBEX 35 fell 4.2 percent.

Yields on 10-year Portuguese bonds jumped 48 basis points to 5.69 percent and Irish 10-year yields surged 19 basis points to 5.10 percent. Japan’s bonds advanced, pushing 10-year yields to the lowest level in four months. The yield fell 2.5 basis points to 1.28 percent.

Debt Insurance

Credit-default swaps on European sovereign debt surged to records. Contracts tied to Greek government bonds climbed 111 basis points to 821, according to CMA DataVision. Portugal rose 54 basis points to 365.

The International Monetary Fund last week raised its forecast for global growth this year while cautioning that a failure to contain soaring public debt may have “severe” consequences for the world economy. Global economic expansion may hit 4.2 percent in 2010, the fastest rate since 2007, the Washington-based fund estimated. “Fiscal fragilities” pose the biggest threat to meeting the forecast, the IMF said April 22.

The S&P 500 retreated from a 19-month high for a second day as growing concern over European debt overshadowed better-than- estimated earnings and consumer confidence. The Chicago Board Options Exchange Volatility Index, the benchmark index for U.S. stock options known as the VIX, surged as much as 33 percent, the most intraday since October 2008.

Winning Streak

The sell-off in the U.S. follows eight straight weeks of gains for the Dow Jones Industrial Average, the longest streak since 2004, and a 9.2 percent rally in the S&P 500 through April 23 that gave the index the largest advance among the world’s 15 biggest markets. The S&P 500’s valuation of 18.2 times earnings in the past 12 months matches its average over the last decade.

The dollar rose against all 16 major counterparts except the yen as investors fled riskier assets. The euro sank to a one-year low of $1.3166 against the greenback.

S&P lowered Greece’s credit rating to BB+ from BBB+ and warned that bondholders could recover as little as 30 percent of their initial investment if the country restructures its debt. The downgraded marked the first time a euro member has lost investment grade rating since the currency’s 1999 debut. S&P also reduced Portugal by two steps to A- from A+.

Greece said the downgrade of its rating by S&P doesn’t reflect the “real facts” of the economy, according to an e- mail from the country’s finance ministry this evening.

‘Sustainable’ Plan

German Chancellor Angela Merkel said yesterday she won’t release funds to help Greece shore up its finances until the nation has a “sustainable” plan to reduce its budget deficit. Germany’s Economy Minister Rainer Bruederle said Greece needs to present a plan to overcome its debt crisis as soon as possible.

“I think it’s directly related to Germany’s indecisiveness and whether they’re going to participate in the bailout,” said Matthew DiFilippo, director of research at Stewart Capital Advisors LLC in Indiana, Pennsylvania, which manages $1 billion. “If Germany doesn’t stand behind Greece, are they going to stand behind Portugal? Greece isn’t significant enough contributor to the EU overall in terms of GDP but it’s maybe just an implication of how this all plays out in other countries like Portugal and Ireland.”

Basic resources stocks posted the largest losses among 19 industry groups in the Stoxx 600, losing 4.8 percent as a group. BHP Billiton Ltd., the world’s biggest mining company, fell 4.2 percent in London. Antofagasta Plc, which owns copper mines in Chile, retreated 3.7 percent. Banco Popular Espanol SA declined 6.1 percent in Madrid after the Spanish lender said first- quarter profit slipped.

Copper Dives

Copper for three-month delivery dropped as much as 1.6 percent to $7,373 per metric ton, the lowest level since March 26, extending a 4.1 percent slump yesterday.

The MSCI Emerging Markets Index fell for the first time in three days, tumbling 1.9 percent. Brazil’s Bovespa index sank 3.4 percent, the most in almost three months, and the real fell the most in three weeks versus the U.S. dollar.

Factbox: Progress towards approving emergency loans to Greece
2:36pm EDT

BRUSSELS (Reuters) – Euro zone governments say they stand ready to provide Greece with 30 billion euros of emergency three-year loans, while the International Monetary Fund may provide some 10 billion to 15 billion euros more.

But how soon Greece gets the money depends on legal procedures in each of the 15 other euro zone countries and the IMF. Greece has limited time because it needs to pay back 8.5 billion euros in maturing debt on May 19.

Below is an overview of how much donors would contribute, dependent on their shares in the capital of the European Central Bank, and the legal hurdles the loans face:

IMF – up to 15 billion euros; IMF officials have said the Europeans want IMF financing not to exceed a third of any total aid package.

When a member country seeks an IMF loan, the fund dispatches a mission to reach an agreement with the country on an economic program. An IMF mission began talks in Athens last week. The IMF has declined to give an end date for the talks, but has said it can move quickly if needed.

Once a program is agreed, IMF loans need the approval of the IMF management and board.

GERMANY – 8.4 billion euros. By adopting accelerated parliamentary proceedings, Germany could approve a law to bail out Greece Friday, May 7, according to Finance Minister Wolfgang Schaeuble.

Schaeuble said Monday he hoped talks in Athens between the European Commission, the IMF, the European Central Bank and the Greek authorities on a detailed austerity program for 2011 and 2012 would be finished by the end of the week.

Any legislation for Greek aid would need a simple majority in a vote by the lower house of parliament. It may also require approval from the upper house, depending on what kind of bill the government drafts.

If upper house approval is required, it could only delay the passage of the bill by calling for mediation to amend it. Were the amended bill to be rejected by the upper house again, the lower house could overrule the upper house.

The opposition Social Democrats (SPD) have threatened to hold up the fast-track process to permit further debate on the Greek aid, which most German voters are opposed to. However, the party is not opposed to aid for Greece in principle.

FRANCE – 6.3 billion euros. The package needs approval by both houses of parliament. The bill is set to be given fast-track treatment and the government hopes it will be passed into law by May 10. Some 3.9 billion euros can be mobilized in 2010. The rest would come later. President Nicolas Sarkozy’s center-right allies say they support the bill. Opposition leftist parties have said nothing, suggesting they won’t create any problems.

ITALY – 5.5 billion euros. The contribution will be authorized by a government decree, which comes into force immediately after it is approved by the cabinet. The decree needs to be approved by both chambers of parliament within 60 days. An Italian Treasury official said last week the government was readying the decree but gave no details on the timeframe.

SPAIN – 3.7 billion euros. Needs to be approved in parliament to be disbursed although the government has not yet provided any date for when it will be presented for approval and Deputy Prime Minister Maria Teresa Fernandez de la Vega said last week the country was ready to release the money for Greece when needed.

NETHERLANDS – 1.8 billion euros. Approval is needed from the both houses of parliament, though a majority of MPs have already said they would back the aid plan. The finance ministry says it will notify parliament the aid is needed after the EU and IMF complete their review in Greece. As soon as the next day the government will submit a supplementary budget bill to parliament with the aid request. It is expected that parliament could act on the bill in as soon as a couple of days.

BELGIUM – 1.07 billion euros. The Belgian government has already approved a text of a draft law, which a government spokeswoman said could be passed by the parliament relatively quickly. However, because of a new government crisis other, unspecified options, may be explored, the spokeswoman said. Belgium expects to have approval for the disbursement of the money at the same time as other euro zone countries.

AUSTRIA – 858 million. Needs approval by both Austrian Finance Minister Josef Proell and Chancellor Werner Faymann. Proell told the Austrian press agency APA Tuesday that Austria’s contribution will be made available only after Greece fulfils every condition to aid as set out by the IMF and euro zone countries, and the entire 30 billion euros has been put together.

PORTUGAL – 770 million euros. Finance Minister Fernando Teixeira dos Santos has said the loan for Greece would be presented to parliament for approval. No date has been set yet for when that will happen.

FINLAND – 550 million euros. The loan, part of a supplementary budget proposal, is due to be discussed by parliament in early May. There has been no indication from the majority 4-party coalition that the loan would not be approved.

IRELAND – 490 million euros. Ireland’s participation requires national legislation and the government has approved the preparation of this legislation.

SLOVAKIA – 310 million euros. It is still not clear whether parliament’s approval will be needed. Slovak Union of Employers objected to the loan, saying the aid was not a good idea and asked the government to focus on domestic problems and issues instead – such as fiscal deficit at 6.8 pct/GDP in 2009.

SLOVENIA – 144 million euros. The aid is expected to be approved by parliament in late May or early June. The government had said all procedures needed to give aid would be finished by the end of June at the latest. The ruling coalition is expected to back the Greek aid legislation in parliament which should be sufficient even if opposition parties vote against it.

LUXEMBOURG – 80 million euros.

CYPRUS – 60 million euros

MALTA – 30 million euros.

(Reporting by euro zone bureaux, compiled by Jan Strupczewski; Editing by Ron Askew)

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