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Markets edge lower on long-term Greece concerns

By Pan Pylas

Associated Press

Published: Monday, March 12 2012 9:05 a.m. MDT

An investor looks at the stock price monitor at a private securities company Monday, March 12, 2012 in Shanghai, China. Asian stock markets fell Monday after China's trade figures underlined a slowdown in the world's No. 2 economy. (AP Photo)

The Associated Press

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LONDON — Stocks edged lower Monday as Greece's newly-issued bonds were trading at rates suggesting fears of a default have not gone away despite the biggest sovereign debt restructuring in history.

Though last week's bond swap with investors — the bulk of which was completed Monday — has erased concern of an imminent bankruptcy, fears remain that Greece will have to negotiate another debt writedown in the future or consider an outright default.

In the short-term, the country will keep living off its rescue loans. European finance ministers will likely approve the country's second massive bailout this week. The bond swap was one of the pre-conditions set by Greece's partners in the eurozone for the country to get its hands on €130 billion ($171.48 billion) financial rescue.

Though the bond swap, which will wipe €105 billion ($138 billion) off Greece's €368 billion ($485 billion) debt mountain, gives Greece breathing space to enact another round of reform measures, many analysts think the country's debt remains unsustainable.

The yields on the new bonds — with maturities of 11 to 30 years — are trading at rates between 13 and 19 percent, indicating that investors think Greece will have to cut its debt further before it can return to markets to fund itself.

"Markets are telling us the Greece still faces a Herculean task," said Louise Cooper, markets analyst at BGC Partners. "If the country's problems were solved by the biggest ever sovereign restructuring ever and the first default in Western Europe for 70 odd years — the last one was Italy in 1940 — then why are the new and shiny bonds trading for the first time today as junk?"

Sentiment in the markets has also been tempered by news that Greece's debt reduction deal with private creditors could cause losses for banks. Last Friday, the International Swaps and Derivatives Association, the private organization that rules on such cases, said a "restructuring credit event" occurred.

That means Greece's debt relief will trigger payouts of so-called credit default swaps, a type of insurance on bonds. But the ISDA said overall payouts will be significantly below the $3.2 billion in net outstanding credit default swap contracts linked to Greece. The exact level of payouts will be determined on March 19.

"Arguably the declaration of a credit event is a better outcome for other peripheral debt markets in so far at it should reduce the chances of a buyers' strike in the future," said Jane Foley, an analyst at Rabobank International. "That said there is little cause for celebration in Europe at present; Greece may have averted a messy default this month but it would take a die-hard optimist to believe that Greece's problems are over."

In Europe, the FTSE 100 index of leading British shares was down 0.2 percent at 5,874 while the CAC-40 in France fell 0.4 percent to 3,474. Germany's DAX was flat at 6,882.

In the U.S., the Dow Jones industrial average was up 0.1 percent at 12,933 while the broader S&P 500 index fell 0.2 percent to 1,368.

There was little activity in the currency markets, with the euro 0.1 percent lower on the day at $1.3112.

Earlier in Asia, sentiment was weighed down by weekend news that China reported its biggest monthly trade deficit in at least a decade in February as imports rebounded after a Lunar New Year holiday slowdown in January. But the combined figures for both months showed growth in imports and exports decelerating markedly.

Mainland Chinese shares were mixed, with the benchmark Shanghai Composite Index falling 0.2 percent to 2,434.86. The smaller Shenzhen Composite Index gained 0.4 percent to 999.63. Hong Kong's Hang Seng added 0.2 percent to 21,134.18 after spending much of the day in negative territory.

Japan's Nikkei 225 Index fell 0.4 percent to 9,889.86 and South Korea's Kospi dropped 0.8 percent to 2,002.50.

Oil prices fell after four days of rises — benchmark oil for April delivery was down $1.77 to $105.63 in electronic trading on the New York Mercantile Exchange.

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Pamela Sampson in Bangkok contributed to this report.

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