Long-dormant concerns over Greece flare up, causing dramatic sell-off in stock, bond markets

Photo: The Canadian Press. All rights reserved.

Employees walk under the screens showing falling stocks at the Athens Stock Exchange, in red, Wednesday Oct. 15, 2014. Concerns that the Greek government could collapse next year, putting its bailout program in danger, caused a massive sell-off in the country's stock and bond markets on Wednesday, with the main stock index down 9.8 percent. The plunge follows a loss of 5.7 percent the previous day and brings the stock market to its lowest level in 14 months. (AP Photo/Petros Giannakouris)

ATHENS, Greece - After months out of the spotlight, Greece was back at the centre of Europe's financial troubles on Wednesday, when concerns over the stability of the government and its bailout program triggered a massive sell-off in stocks and bonds.

Greece's main stock index closed 6.3 per cent lower — having traded down as much as 9.8 per cent lower earlier in the day. Following a 5.7 per cent loss on Tuesday, that brings the index to its worst level in 14 months.

Yields on Greece's 10-year bonds also rose sharply, to 7.73 per cent — up 1.10 percentage points on the day, a sign investors are more worried about default.

Economist Megan Greene said investors were rattled by a combination of factors, with the sudden rise in Greece's borrowing rates likely to hurt the country's hopes of leaving its bailout program.

The benchmark 10-year borrowing rate has risen from a low of 5.5 per cent in September, making it harder for the country to hope to finance itself on markets and no longer depend on bailout loans. The government had hoped to emerge from its bailout program earlier than planned.

"The rising government borrowing costs should be a wakeup call to the Greek government not to tempt the markets with an early bailout exit," said Greene, chief economist at Manulife Asset Management.

Greece was at the heart of the eurozone debt crisis that started in 2009 and resulted in Athens receiving bailout loans worth 240 euros billion ($304 billion) to avoid bankruptcy. The country has since then stumbled through an economic depression and is this year finally seeing a stabilization in its economy.

But its massive national debt is still not considered sustainable. That could mean it may need more rescue loans or seek further improvement to its bailout loan repayment terms.

Though Wednesday's losses come amid a wider drop in global markets, they were exacerbated by a survey on Monday indicating the government may not last through the winter. The poll showed the opposition Syriza party — which wants Greece to renege on part of the bailout loans it owes fellow European countries and the International Monetary Fund — had a widening lead over the governing conservatives.

The government will rely on opposition support in February to elect a new president. Without it, the government would collapse.

Syriza is arguing Greece's economy cannot recover unless a substantial portion of money owed to bailout creditors is cancelled. It describes the dramatic increase in poverty and unemployment after years of austerity measures as a "humanitarian crisis."

A default on Greece's bailout loans could have uncertain financial consequences, however. International investors may shy away for years from lending to the country for fear of not being repaid, for example.

Conservative Prime Minister Antonis Samaras chaired a cabinet meeting on the economy after markets closed Wednesday.

His Socialist coalition partner, Deputy Prime Minister Evangelos Venizelos, said doubts over Greece's political stability posed the biggest threat to the country's recovery.

"We can see just how fragile the situation is ... and the danger of turning pretty domestic political squabbles into reasons for the markets to turn against us," Venizelos said.

"What we are seeing today, is scenes from the future that must be avoided."

To make matters worse, Greene, the analyst, said there were concerns that Greece's banks might get hit by upcoming stress tests by the European Central Bank, due to their rising number of bad loans. The ECB is reviewing eurozone banks to see if they are healthy enough — if not, they will be required to raise money on markets or receive bailouts.

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