World financial markets hit by Greece junk downgrade

Global equities weakened, the euro hit a one-year dollar low and bonds took a beating Wednesday amid growing fears that Greece was heading toward a default that would shake the eurozone.

A fierce worlwide stocks sell-off was sparked on Tuesday after ratings agency Standard & Poor's cut Greek debt to junk status, while a downgrade to Portugal also stoked concerns about a widening eurozone crisis.

The euro plunged on Wednesday to 1.3143 dollars -- a low last seen in April 2009 -- as traders fretted over a crisis that could spread to other fiscally-challenged nations like Ireland, Italy and Spain.

The European single currency slightly recovered in afternoon trade to 1.3245 dollars.

Eurozone borrowing costs rocketed higher, with Greek 10-year bond yields hitting a record above 11 percent. Long-term bond yields also faced heavy pressure in Portugal, Spain and Ireland.

"The bottom line is that default by Greece may now be only a matter of days away," said analyst Howard Wheeldon at BGC Partners in London.

"In the wake of junk status downgrade, the worsening situation in Greece has not surprisingly seriously impacted on global market confidence."

The European Union announced that it would hold an emergency summit on Greece, which has asked the EU to quickly activate a multi-billion-euro bailout to help the country remain solvent.

The Frankfurt stock market dropped 0.56 percent and Paris shed 0.81 percent. London bucked the trend, however, and was up 0.34 percent.

In Spain and Italy, which are on the firing line over their own high deficits, Madrid dropped 0.91 percent and Milan shed 0.98 percent.

"The downgrading of Portuguese and Greek debt has spooked investors, as there is a very real fear that other European countries could be downgraded too," said analyst Owen Ireland at ODL Securities.

However, Athens jumped 2.38 percent after the Greek stock exchange imposed a ban on short-selling -- the sale of securities or commodity futures not actually owned by a seller who hopes to buy them back later at a lower price.

The Portuguese stock market also rebounded from heavy opening losses Wednesday and gained 1.0 percent as the government and the opposition vowed to work together to ensure economic stability.

But in earlier Asian trade, Tokyo slumped 2.57 percent and Hong Kong dived 1.26 percent amid heightend eurozone debt concerns.

In Brussels, talks on putting in place emergency aid for debt-laden Greece are making "rapid progress," the European Commission said, with the work set to be finalised "in the coming days."

EU leaders have already agreed in principle, with the International Monetary Fund (IMF), to offer Athens 45 billion euros (60 billion dollars) for the first year of a three-year programme of help.

Greece is also "negotiating" the precise amount the IMF could lend the debt-hit country, a government source told AFP Wednesday following reports the global lender could boost its contribution by 10 billion euros.

"Any hope that the Greek issue was finally coming under control took a huge blow yesterday with the country's sovereign debt being downgraded to junk," added IG Markets analyst Ben Potter.

The news sparked "a quick run of selling on equity markets across the globe that was reminiscent of the chaos of 2008," he added.

Wall Street shed 1.90 percent overnight as the Greek and Portuguese downgrades reverberated across the globe.

But it slightly recovered in opening trade Wednesday with the Dow Jones Industrial Average rising 0.19 percent.

"The positive bias is part and parcel a reflex trade that tends to follow outsized declines," said analyst Patrick O'Hare at research firm Briefing.com.

"What everyone is waiting to see is if the reflex trade becomes a sustained trade or a trade that quickly runs out of gas," he said.

EU President Herman Van Rompuy said eurozone leaders would meet in Brussels "by around May 10" to try to agree how to set up a massive rescue operation and insisted there was "no question" of Greece defaulting.

GFT analyst David Morrison said that German Chancellor Angela Merkel would not want to hold the EU summit prior to this date.

"Of course it is the day after the German regional elections and Angela Merkel dare not OK a Greek bailout before then because she will get hammered," Morrison told AFP.

"But the likelihood is that the bond markets will force quicker action," he added.