European stocks drop amid worries over Greek deal

With Greek negotiations hanging in balance, European investors shy away from stocks

Associated Press

PARIS (AP) -- European leaders' hard line in negotiations with Greek bondholders drove stock markets lower on Tuesday as investors worried that a deal necessary to cut Athens' mountain of debt might fall through.

After 10 hours of talks on Monday, the finance ministers of the countries that use the euro announced that Greece would pay less than 4 percent interest on the new bonds creditors will get in a swap meant to cut Greece's debt by about euro100 billion ($130 billion).

The deal is crucial to Greece's and the eurozone's stability since it's clear there's no way Athens can ever pay back all that it owes. Banks that hold Greek debt have already been asked to take a 50 percent loss on those investments — and some think even that writedown isn't big enough.

The negotiations involve a delicate balancing act between getting a deal large enough to ensure that Greece can someday dig out from under its pile of debts but not so harmful to banks that it scares investors off from investing in any eurozone debt.

European leaders have promised Greece is a special case and bondholders won't ever be asked to take losses again, but there are signs that investors are staying clear of the bonds of other vulnerable countries, like Portugal.

Time is running out for politicians and the banks to get it right — Greece has several billions of euros of debt coming due in March — and stocks dropped Tuesday amid worries they might not.

In France, the CAC-40 fell 0.8 percent to 3,312, while Germany's DAX dropped 1 percent at 6,370. The FTSE index of leading British shares was down 0.7 percent to 5,740.

Wall Street was also set to open lower. Dow futures fell 0.3 percent at 12,609 and S&P futures dropped 0.4 percent to 1,305.

The euro fell 0.2 percent to $1.3000.

Politicians are also aware that European banks are under tremendous pressure because of the amount of government debt they hold and have seen their stock prices crash and their sources of funding dry up during the crisis. Late Monday, Standard & Poor's downgraded the credit ratings of two major French banks, Credit Agricole and Societe Generale. They confirmed the rating of a third major bank, BNP Paribas, but the stock prices of all three plummeted Tuesday, underscoring how fragile all financial institutions are.

Compounding these concerns is the poor state of Europe's economy and worries that the eurozone is slipping back into recession. Even relatively positive results from two economic surveys released Tuesday were not enough to ease those worries.

January's manufacturing purchasing managers' composite index rose to 48.7 from 46.9, according to Markit, a financial data company. The services PMI rose to 50.5 from 48.8. Both surveys, which are considered indicators for growth, beat the expectations of analysts, but experts warned they are far from good news.

"While the January purchasing managers' surveys lift hopes that eurozone activity is stabilizing, they also suggest that the eurozone is far from out of the economic woods," said Howard Archer, an analyst with IHS Global Insight. "Worrying elements remain in the purchasing managers' surveys and we suspect that it is still more likely than not that the eurozone will suffer further contraction in the first quarter of 2012 which will put it back into recession."

Concerns about the state of economy even tempered oil prices, which had been skyrocketing after European leaders announced they would stop buying Iranian oil in an effort to pressure Tehran into resuming talks on its nuclear program.

Benchmark oil fell back 30 cents to $99.28 in electronic trading on the New York Mercantile Exchange.

Earlier in Asia, Japan's Nikkei 225 stock rose 0.2 percent to 8,785.33 despite the central bank cutting growth forecasts for the fiscal year ending March 2012 and the following year because of a slowdown in overseas demand and the strong yen.

Australia's S&P/ASX 200 closed little changed at 4,224.20. Indonesia's benchmark was up 0.1 percent at 3,994.91 and India's Sensex was 1.5 percent higher at 16,997.35 after the Reserve Bank of India lowered cash reserve requirements for commercial lenders.

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