Stocks slump as Greece debt downgraded to junk

By Peter Whoriskey and Dina ElBoghdady
Washington Post Staff Writers
Wednesday, April 28, 2010; 2:52 AM

A leading credit agency lowered Greece's rating to junk status, dealing a blow to an international rescue plan for the country and hammering U.S. and European stock markets.

The junk rating, unusual for a developed nation, deepened fears that big fiscal deficits and debt burdens elsewhere could threaten the economic recovery in Europe. Stock markets on both sides of the Atlantic tumbled about 2 percent or more after the downgrade by Standard & Poor's.

The downgrade fanned investors' doubts that the proposed economic reforms in Greece will go far enough to prevent the country from spiraling into even deeper trouble. It also presented a new obstacle to the planned $60 billion bailout from European governments and the International Monetary Fund.

The Dow Jones industrial average lost 1.9 percent to 10,991.99, while the broader Standard & Poor's 500-stock index fell 2.3 percent to 1183.71. They were the biggest one-day losses in more than two months. The sell-off spread to Asia Wednesday, with Japan's Nikkei average falling 2.6 percent.

The junk rating and investor skepticism make it harder for the country to finance its debt because they raise the interest rates it is charged. They also put pressure on the Greek government to carry out promised fiscal reforms despite determined political opposition.

"I am determined to do whatever it takes, when it is needed, to revive our country," Prime Minister George Papandreou told parliamentary deputies Tuesday. "It's now or never -- but we will succeed."

The credit agency on Tuesday also downgraded the rating of Portugal, another country in which the government faces a mountain of debt. Portugal's rating is still investment grade.

The two downgrades raised concerns that turmoil could arise elsewhere. A number of countries must work themselves out from under staggering debt burdens, and the possibility that any one of them could default has made investors skittish.

"Most advanced industrial countries in worst ever peacetime fiscal shape," a report from Citigroup warned this week. Although the risk of defaults outside Greece was still low, it said, efforts to balance government budgets "will be a drag on growth for years to come for advanced industrial countries."

Standard & Poor's dismissed the suggestion that its announcement caused the turmoil Tuesday. Indeed, the strain on Greece's finances were apparent Monday when investors sharply drove down the price of Greek bonds, effectively raising interest rates.

"Ratings just hold a mirror up to nature," said John B. Chambers, chairman of S&P's sovereign rating committee. "The fate of Greece is in the hands of the policymakers."

Under the burden of government debt now estimated to be 124 percent of the country's gross domestic product, Greek leaders are working on economic reforms that would raise taxes, cut government wages, rein in pension costs, and privatize government-held firms such banks, utilities and telecoms.

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