Unreliable Rating Agencies’ Moves Rattle Asian, Euro Markets

But for some weird reason, people DO, and so it was on Tuesday in Europe and Wednesday in Asia,

with the highlight move being S&P’s downgrading of Club Med country debt on those two days.

The ratings agency Standard & Poor’s lowered the debt rating of Spain on Wednesday, its third downgrade of a European country in two days, according to this interesting, comprehensive and disturbing article in the New York Times. [br]

The downgrade came one day after the S.& P. cut the ratings of Greek and Portuguese debt,

moves that set off a flight by investors away from global equities and into fixed income securities, particularly those in United States dollars.

The news Wednesday set off no such reaction, although an index of Spanish stocks fell about 3 percent. The S.&P. downgraded Spain’s debt one step, to AA, with a negative outlook.

With Greece inching closer to the brink of financial collapse, fear that the debt crisis will spread rattled global markets for a second day on Wednesday as investors awaited a signal from financial leaders gathering in Berlin.

Shares slumped 1 to 2 percent across much of Europe and Asia, and the euro briefly fell to its lowest level in about a year against the dollar,

as investors worried that Portugal, Spain and even Ireland might not be able to borrow the billions of dollars they need to finance their government spending …

Investors have grown increasingly nervous about the fate of Greece and other economies that use the euro.

A recent proposal by European governments to extend a 45 billion euro loan to help Greece pay its bills, together with a smaller pledge by the International Monetary Fund, has done little to calm the markets.

Germany’s statement this week that it must first see more deficit reduction from Greece before fulfilling its pledge has only increased concerns that Europe is not united behind Greece.

“It’s like Lehman Brothers and Bear Stearns,” said Philip Lane, a professor of international economics at Trinity College in Ireland, referring to the Wall Street failures that propelled the financial crisis of 2008.

“It is not so much the fundamentals as it is the unwillingness of the market to fund you” …

Ángel Gurría, head of the O.E.C.D., said ahead of the meeting that the euro zone countries had to act “very fast.”

“It’s not a question of the danger of contagion,” he told Bloomberg television. [br]

“Contagion has already happened. This is like Ebola. When you realize you have it you have to cut your leg off in order to survive.”

The problem is that it is not just Greece, which expects to receive international aid, but Portugal, Spain and other countries that must issue more debt soon …

European leaders scrambled Wednesday to quell the market instability growing out of Greece’s debt crisis,

with German officials seeking legislative approval for a major contribution to an international aid package that looks as if it could reach 120 billion euros ($160 billion) over the next three years.

One day after cutting Greece’s status to junk and downgrading Portugal, a major ratings agency also cut Spain’s debt rating by a notch and the euro reached a one-year low,

underscoring how difficult it will be for Europe to contain problems that started in Greece.

“Every day which is lost is a day where the situation is getting worse and worse, not only in Greece but in the whole European Union,” said Dominique Strauss-Kahn, managing director of the International Monetary Fund.

“It’s the confidence in the zone which is at stake and that’s why we need to act swiftly and strongly.”

After meeting here with Mr. Strauss-Kahn, Chancellor Angela Merkel of Germany seemed to find a new sense of urgency in dealing with the crisis.

“It’s completely clear that the negotiations by the Greek government with the European Commission and the I.M.F. must now be accelerated,” she said. “Germany will do its part to safeguard the euro as a whole.”

As pointed out in a key ITN item two days ago, the time for this attitude from her and Germany was weeks ago,

BEFORE the hedge funds and other speculators got into the Greek and Portuguese, and now Spanish, debt markets,

and drove bond prices up – meaning the inevitable rescue, which Merkl & her German supporters pretended was optional,

will now cost THEY THEMSELVES much more than would have been the case had they now bothered with the histrionics and stepped up to the plate to do their “European” duty. ]

Germany’s share could reach $32 billion, triple the sum under discussion for this year.

“It is important to act quickly,” said the Green Party’s Jurgen Trittin, criticizing what he called Mrs. Merkel’s policy of “hesitance and indecision.”

Mrs. Merkel has balked at any kind of bailout, a prospect highly unpopular with German voters.

But the downgrading of Greece’s credit rating to junk level and the resulting plunge in markets appeared to have spurred her government to take a more aggressive stance, along with a promise to move quickly once a deal is reached with Greece …

For months Mrs. Merkel played for time, talking tough on Greek debt and the need for austerity measures while hoping to stave off a bailout decision until after a key regional election later this month in Germany’s most populous state.

Instead, skittish markets and ratings agencies have forced her hand directly in the middle of the run-up to the vote …

The effects continued to ripple through European markets following the agency’s downgrades on Tuesday, which took Greece’s sovereign ratings below investment grade, forcing a number of institutional investors to cut holdings of Greek assets.

Many institutions have investment rules that preclude or restrict them from holding paper rated as junk …

in the view of some analysts, the downgrades solidified the potential for another downward price spiral in markets, if the euro-area financing problems drag on.

“It is probably fair to say that Tuesday, 27 April was the day that the situation in the euro area took a dramatic and rather frightening turn for the worse,” credit analysts at Credit Suisse in London said in a research note Wednesday.

“The concern is the extent and speed of the spreading of the crisis in an environment of too many financial obligations, not all of which will be serviced, in our view, and in a crisis which in our view is about far more than Greece.”

The bank noted that market contagion triggered by the collapse of the American hedge fund Long-Term Capital Management in 1998 after some of its bets on Russian debt turned sour,

continued to create distortion in the swaps market and problems for pension funds for years after the event.

But the effects of the collapse could have been far worse if the fund had not been bailed out in a Wall Street operation orchestrated by the Federal Reserve Bank of New York.