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World Markets Affected by Greek Debt Resolution Delays

9 February 2012 - Features - Editor

As the European Central Bank struggles to reach consensus on how it will contribute to the restructuring of Greece's debt, stocks on Wall Street closed higher than expected. The Dow Jones Industrial Average gained 5.75 points to 12,884; the Nasdaq Composite climbed 11.8 points to 2,916; and the Standard & Poor's 500 rose by 2.9 points to close the day at 1,350. In contrast London's FTSE dropped by 0.24 percent, with Germany's DAX closing down 0.08 percent. Hong Kong's Hang Seng index rose 1.54 percent, and Japan's Nikkei Average close 1.1 percent up.

Greek Prime Minister Lucas Papademos is engaged in negotiations with his country's political leaders in an attempt to finalize austerity measures. The austerity package has reportedly been presented in a fifty-page document to be studied by the three parties supporting the country’s transition government under the leadership of Papademos. Emphasizing the meaning of "austerity" in economic jargon, the package includes cuts of up to €360 from monthly pensions, a twenty percent reduction on minimum wages, and the loss of up to 15,000 civil service jobs.

The support of the European Central Bank is vital for Greece to resolve its debt problems, as it urgently requires €130 billion to avoid defaulting. The restructuring measures aim to reduce the country's debts by approximately €100 billion, reducing gross domestic product from 160 percent to 120 percent by the year 2020. One of the main concerns expressed by the ECB is that an additional bailout at this stage may derail efforts at implementing austerity measures, especially in light of public outcry and protests.

Private creditors have indicated a willingness to negotiate on outstanding debt, including the possibility of taking up to a 70 percent write-down on Greek sovereign debt holdings. But the ECB is the largest holder of Greece's sovereign debt, having bought these holdings below face value. It is estimated that the difference between face value and market price of the bonds amounts to roughly €11 billion, being the amount Greece urgently needs, and it appears likely, but not confirmed, that the ECB will forwarded these funds to Athens.

As the situation in Greece becomes more desperate, investors will no doubt be keen to hear what solutions will be decided on by the European Central Bank and the Greek authorities. Whatever, those solutions may be, it's clear that the economic woes in Europe are affecting global markets.

 


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