By Justin Carrigan and Stuart Wallace

Greek bonds dropped, sending the yield premium over German debt to the widest since the euro’s inception, and stocks tumbled on speculation that the bailout of Europe’s most indebted nation will unravel. The yen rallied.

The Greek 10-year spread to benchmark German bunds widened to 440 basis points at 10:28 a.m. in London. Greece’s ASE Index of stocks slid 5 percent, the most in almost four months, and the cost of insuring against a default by the nation climbed to a record. The Stoxx Europe 600 Index fell 1.3 percent and futures on the Standard & Poor’s 500 Index slipped 0.5 percent. The euro weakened for a fifth day against the dollar, and the yen advanced versus all of its 16 most-traded counterparts.

“There is now increasing uncertainty surrounding Greece’s ability to raise the required amount of funding without recourse to the emergency lending facility provided by euro member states and the IMF,” Steven Mansell, a strategist at Citigroup Inc. in London, wrote in a report. “This raises the question of whether or not tensions will also rise in other peripheral markets. We think that some form of contagion is inevitable.”

Finance Minister George Papaconstantinou said Greece doesn’t need additional austerity measures, hours before European Central Bank President Jean-Claude Trichet is expected to announce changes to the collateral the central bank accepts for loans as it looks to support the nation. Europe’s economy unexpectedly stagnated in the fourth quarter, and Japanese machinery orders and U.S. consumer credit slumped, adding to investor concern that the economic rebound may falter.

Borrowing Costs Surge

Declines in Greek bonds pushed the yield on the government’s two-year note up by 136 basis points, driving the cost of funds to 8.3 percent from 5.2 percent at the end of last week, while the 10-year yield added 32 basis points. Portugal’s 10-year yield climbed 11 basis points to 4.36 percent. Credit- default swaps on Greece’s government debt increased 32 basis points to a record 445.5, according to CMA DataVision prices.

Greek banks slumped, with EFG Eurobank Ergasias SA, the country’s second-largest lender, tumbling 7.3 percent for the biggest decline on the Stoxx 600. Papaconstantinou told ANT1 television that additional budget cuts designed to trim a budget deficit that reached 12.9 percent of gross domestic product last year won’t be needed so long as existing measures are implemented “correctly.”

Emerging Markets

The MSCI World Index of 23 developed nations’ stocks fell 0.6 percent while the MSCI Emerging Markets Index fell for the first time in 10 days, sliding 0.9 percent. In Europe, all 19 industry groups in the Stoxx 600 declined, led by basic resources shares and banks. BHP Billiton Ltd., the world’s biggest mining company, dropped 1.6 percent in London. The MSCI Asia Pacific Index lost 0.7 percent, its first drop in six days.

The decline in U.S. futures indicated the S&P 500 may extend yesterday’s 0.6 percent drop. Initial jobless applications fell by 4,000 to 435,000 in the week ended April 3, according to the median forecast of 47 economists surveyed by Bloomberg News before a Labor Department report due at 8:30 a.m. in Washington.

The euro weakened 0.6 percent compared with the yen and 0.4 percent versus the dollar. The yen advanced 1.1 percent against both the rand and the New Zealand dollar as investors sought the relative safety of the Japanese currency at the expense of higher-yielding assets.

German government bonds gained, with the yield on the 10- year bund dropping 5 basis points to 0.91 percent. Bunds are Europe’s benchmark debt securities because Germany is Europe’s biggest economy.

U.S. 30-year bond yields rose 1 basis point to 4.75 percent before the government sells $13 billion of the securities today. Ten-year notes were little changed after surging yesterday following an auction that drew the strongest demand in at least 16 years. The yield was at 3.87 percent.

Copper fell for a second day, declining 1.2 percent to $7,848 a metric ton on the London Metal Exchange. Aluminum, nickel and zinc also retreated. Gold fell 0.4 percent to $1,144.88 an ounce as the dollar strengthened, and crude oil dropped 0.6 percent to $85.36 a barrel in New York.

source: Bloomberg

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