EU plans to lower bailout interest rates hits stocks

PLANS by the European Union to lower interest rates on bailout loans to Greece and Ireland hit European stocks hard yesterday and drove up bond yields of the troubled eurozone economies.

When ratings agency Standard & Poor’s cut Greece’s credit rating further into junk territory, it added to mounting rumours about a full-on restructuring of Greek debt.

Standard & Poor’s said far more radical measures would be required to make Greece’s €327 billion debt sustainable.

While the Greek government was quick to quash rumours that it was planning to leave the eurozone and return to the Drachma, the talk hit the main European exchanges hard.

Each of the three main exchanges were down — London’s FTSE was down by 0.6% to 5,943 points, the CAC 40 in Paris falling by 1.25% to just over 4,000 points and the DAX in Frankfurt dropping by 1.09% to 7,411 points.

In Dublin, the ISEQ finished down by just under 0.7% at 2,973 points.

A spokesman for German chancellor Angela Merkel said she would meet European Commission president Jose Manuel Barroso, head of the EU’s executive arm, and European Council president Herman van Rompuy tomorrow to review the situation. The spokesman said a Greek exit from the euro had never been under discussion and was not now.

One of the German government’s economic advisers, Peter Bofinger, told Reuters Insider television that unless there was a comprehensive solution for all eurozone debt problems, “I’m not sure whether the euro area will remain intact for the next 12 months”.

Eurozone and EU finance ministers are due to meet next week to approve a €78bn euro rescue for Portugal amid lingering uncertainty over whether Finland, which has a caretaker government and has not yet begun talks on a new coalition, will be in a position to give the required agreement.

Pressure is mounting for those meetings to deliver decisions on Ireland and Greece as well, but eurozone sources said no action was likely on Greece until June at the earliest.