European Indexes Drop, Greek 2-year Bond Yield Soars to 25.4%

Nigel Thomas
09 May, 2011
New York City

European markets opened lower and declined sharply in the late afternoon on the worries that Greek bonds may face restructuring as early as next month. Banks and insurance companies declined in the region. Yields on 2-year Greek bonds surged to 25.4% and yields on Irish and Portuguese bonds surged.

[R]1:45 AM New York – European markets opened lower and declined sharply in the late afternoon on the worries that Greek bonds may face restructuring as early as next month. Banks and insurance companies declined in the region. Yields on 2-year Greek bonds surged to 25.4% and yields on Irish and Portuguese bonds surged.[/R]

Stocks in Europe were on declined after sovereign debt default resurfaced. Investors focused on Greece as speculation mounted on the need for another bailout and the prospect of Greece leaving the union.

For now, economists do not see the case for Greece to leave the European Union as the nation struggles with high debt, shrinking economy, falling tax revenues and high government spending. If Greece leaves the union, the run on Greek banks may wipe out its entire banking system and lead to a collapse in its economy, not the best outcome for the nation.

Banks and insurance companies lead the benchmark indexes lower in Europe. DAX 30 index declined 1.2% or 90.32 to 7,401.93 and CAC 40 dropped 1.5% or 59.47 to 3,998.39.

The yield on 2-year bonds increased 8 basis points to 25.42% and 10-year bond increased 10 basis points to 15.62%. The drop in Greek bonds also affected yields on Portuguese and Irish bonds.

The yield on 2-year Portuguese notes increased 20 basis points to 11.87% and Irish bonds rose to 12.03%.

As usual, rating agencies lagged the market sentiment and S&P lowered its rating on Greek debt today deeper in junk category on the mounting worries that debt restructuring is increasingly likely.

Investors are increasingly factoring in a Greek bonds restructuring or a default and at least 20% reduction in principal payment.

Stock Movers

German banks declined on Greek worries. Deutsche Bank fell 1.7% to 42.40 euros and Commerzbank AG fell 1.8% to 4.19 euros.

Munich Re dropped 1.6% to 110.30 euros after it reported a net loss in the first quarter of 948 million euros compared to net income of 485 million euros a year ago quarter. The losses were linked to disasters in Asia and Australia but the company still estimated annual profit.

Barclays declined 1.3% to 273.95 pence after it set aside 1 billion pounds to compensate clients who were sold payment protection insurance plan. The company lost an appeal to high court against tighter regulation of payment protection insurance.

E.ON dropped 2.2% to 21.11 euros and RWE declined 1.7% to 42.95 euros.

Elexis soared 14.7% to 19.50 euros after the company received a buyout proposal from SMS for 19 euros a share.