TA ΞΕΝΑ ΜΕΣΑ ΜΑΖΙΚΗΣ ΕΝΗΜΕΡΩΣΗΣ ΓΡΑΦΟΥΝ ΓΙΑ ΜΑΣ:

Greek crisis hits world markets

• European stock markets slide

• Euro hits three-week low against the dollar

• Greek bond yields hit nearly 30%

Graeme Wearden

guardian.co.uk, Thursday 16 June 2011 09.27 BST

Article history

The Greek crisis has rocked world stock markets.P Photograph: Yannis Behrakis/REUTERS

World stock markets fell sharply again on Thursday as the imminent prospect of a Greek debt default gripped investors.

Greece's bonds also hit record levels after Wednesday's violent riots piled fresh pressure on an Athens government already on the edge. There was also concern that Europe lacks the firepower to bring the ongoing debt crisis under control, with a member of the European Central Bank (ECB) warning that the existing rescue package needs to be doubled to €1.5 trillion (£1.3tn).

In London, the FTSE 100 shed 63 points at the start of trading to 5679, a drop of more than 1%. Just three shares were higher, as the blue chip index hit its lowest level since 17 March.

European markets also suffered losses. France's CAC dropped by 1.5%, led by French banks which have large exposure to Greek debt, while the German DAX was 0.7% lower. Earlier, the panic in Greece touched Asia, with Japan's Nikkei dropping by 1.7% to 9,411.28 in a nervy session.

The euro also suffered, hitting a three week low against the dollar, as traders warned that a Greek default would have catastrophic consequences for the global markets.

"With Greek sovereign debt squarely back on the agenda, risk appetite amongst traders is very much off and equities are coming under sustained pressure as a result," said Cameron Peacock of IG Markets.

"A new government is set to be formed in Athens today against a backdrop of civil unrest and the big concern is that politics gets in the way of the second tranche of the bailout, in turn forcing a debt restructuring in the Eurozone," Peacock added.

George Papandreou, the Greek prime minister, announced on Wednesday night that he would seek a vote of confidence on a new government after offering to resign. He hopes to create a new national unity coalition with opposition conservatives, in an effort to stabilise the country.

Bond traders, though, continued to view Greek debt as hugely risky. The yield, or effective interest rate, on Greek two-year bonds hit 29.468%, a lifetime record. The cost of insuring Greek debt against collapse spiked, with the five-year credit default swap leaping 124 basis points to a record high of 1,850bp, according to Markit. That means it would cost €1.85m to insure €10m of Greek debt.

"The impasse within the institutions of the EU, as well as the political and social upheaval within Greece, has roiled the markets," said Gavan Nolan, director of credit research at Markit.

European leaders have been debating their next move in the Greek crisis for several weeks, after it became clear that the country needs a second bailout. However, it is unclear how a plan can be drawn up that will save Greece from default.

One option is to restructure of some of its €330bn debt, with lenders agreeing to defer repayments. Credit rating agencies, though, have warned that such a plan would be treated as a default.

Gary Jenkins, head of fixed income research at Evolution Securities, does not believe that this debt "reprofiling" is feasable.

"I still fail to see why an investor would want to agree to extend maturities rather than get paid back in full and on time," said Jenkins. "If the choice is extend or default then it could be argued that it is not a voluntary decision and certainly the rating agencies will regard it as a default."

Earlier, ECB governing council member Nout Wellink predicted that the European bailout fund should be doubled to €1.5tn, to stave off the risk of a new Greek bailout triggering renewed crisis in Ireland and Portugal.

"If you take these risks, you need to build a safety net," Wellink told Dutch newspaper Het Financieele Dagblad. "If ratings agencies see a rollover (of Greek debt) as a partial default, contagion to other peripheral euro zone countries will occur."