The FTSE 100 plunged 2.6 per cent to 5,603.52, while the Dow Jones Index lost 1.9 per cent to 10.992 as Standard & Poor’s said the Greek government faced a narrowing range of policy options.
S&P moved Athens’ debt three notches down, making it the first eurozone member to be rated below investment grade in the history of the single currency.
Yields on Greece’s 10-year debt stayed around the punishing 9.5 per cent level while spreads over German bunds widened to a 12-year record of 682 basis points.
S&P also bumped Portugal’s bonds three notches down to BB+, heightening fears over contagion from the Greek crisis.
IHS Global Insight described S&P’s de-rating of Greece as “devastating”. Senior economist Diego Iscaro said: “The chances of Greece solving this situation without restructuring its debts are now dim.”
Gary Jenkins of Evolution Securities said uncertainty over whether Germany would approve the €45bn (£39bn) EU and IMF aid package for Athens was the greatest danger. He said: “They’ve not acted quickly enough. [Policymakers] have lost control.”
S&P’s junk rating for Greek debt will be the trigger that forces Germany to step in, another analyst suggested. The Bundestag has refused to sign off support until it sees detailed spending plans for 2011 and 2012. Greece urgently needs €8.5bn to service debts by 19 May.