Global Business

Cuts to Debt Rating Stir Anxiety in Europe

Francisco Seco/Associated Press

A passenger waited for a train at the Rossio station in Lisbon as transport workers in both Portugal and Greece went on strike against austerity measures on Tuesday.

FRANKFURT — Greece’s credit rating was lowered to junk status Tuesday by a leading credit agency, a decision that rocked financial markets and deepened fears that a debt crisis in Europe could spiral out of control.

The ratings agency, Standard & Poor’s, downgraded Greece’s long-term and short-term debt to non-investment status and cautioned that investors who bought Greek bonds faced dwindling odds of getting their money back if Greece defaulted or went through a debt restructuring. The move came shortly after S.&P. reduced Portugal’s credit rating and warned that more downgrades were possible.

The downgrades, announced near the end of trading in Europe, came amid rising political tensions across the Continent that had already punished Greek bonds and sent stock prices down sharply from London to Paris to New York. The Dow Jones industrial average slumped by 213.04 points to close at 10,991.99, a fall of 1.9 percent for the day; major indexes in Western Europe fell by 2.5 percent or more. Investors, worried about shock waves in the broader European economy, also migrated away from the euro and pushed the dollar and Treasury bonds higher. The euro slid to $1.3316 in afternoon trading in New York from $1.3382 late Tuesday.

“This is a signal to the markets that the situation is deteriorating rapidly, and it’s not clear who’s in a position to stop the Greeks from going into a default situation,” said Edward Yardeni, president of Yardeni Research. “That creates a spillover effect into Portugal and Spain and raises the whole sovereign debt issue.”

As transportation workers in Portugal and Greece went on strike against austerity measures Tuesday, the risk premium on Greece’s bonds set records even before S.&P. announced the downgrades.

Investors were unsettled by perceptions that European leaders have not yet shown they can contain the fallout from Greece’s problems, as well as the political resistance in Germany to using taxpayer money for a rescue.

“This thing is getting more and more urgent and tense,” said Robert Barrie, head of European economics at Credit Suisse in London. He said the markets could settle down once Greece manages to refinance €8.5 billion, or $11.2 billion, in bonds that mature in May. “But it’s anything but calm at the moment,” he added.

In an effort to show unity, European Union governments may hold a summit meeting May 10 to discuss releasing aid to Greece, according to an E.U. official who was knowledgeable about the ongoing talks on the matter, but who declined to be identified because the date was not yet confirmed.

The meeting could also provide a forum for Germany, where a large majority of voters oppose aid to Greece, to deliver a stern warning to other over-indebted countries that such aid is exceptional and should be avoided in the future.

Amid the turmoil, a European Central Bank official warned all euro-zone countries to cut their soaring budget deficits and suggested that Greece may need to impose even harsher austerity measures to bring its debt under control.

The central bank vice president, Lucas D. Papademos, who was governor of the Bank of Greece from 1994 to 2002, told members of the European Parliament in Brussels that the Maastricht Treaty, which sets out borrowing limits for euro-zone countries, “is facing its biggest challenge since its adoption in 1993.”

The economic program that European officials and the International Monetary Fund are negotiating with Athens in return for €45 billion in loans at interest rates well below what the market is demanding must “address the root causes of Greece’s fiscal imbalances and structural weaknesses, so as to ensure the sustainability of its public finances and improve the country’s international competitiveness,” he said.

On the streets of Greece and Portugal, labor unions stepped up resistance to the austerity measures that will be crucial to any turnaround.

Jack Healy reported from New York. James Kanter contributed reporting from Brussels.

This article has been revised to reflect the following correction:

Correction: April 30, 2010

An article on Wednesday about growing financial fears in Europe after the downgrading of Greeceā€™s credit rating misstated the date of the Maastricht Treaty, which created the European Union. It came into force in 1993, not 1997. (It was substantially amended by the Treaty of Amsterdam in 1997.)