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* Markets unconvinced by Greece debt bailout
* Euro drops to 14-month low, losing over 1 percent vs USD
* Government bonds surge, German bund yields at record low
By Daniel Bases
NEW YORK, May 5 (Reuters) - Fears of contagion from the
Greek debt crisis knocked the euro to a 14-month low and sent
world stocks reeling as violent protests erupted over Athens'
austerity measures and Moody's warned Portugal's debt could be
downgraded.
U.S. and German bonds surged on investor fears that a
massive aid package would not be enough to ensure other
fiscally weak euro-zone nations don't spiral down.
The euro tumbled 1 percent to $1.2850 <EUR=>, its lowest
point since mid-March 2009 and steepest one-day loss since June
of last year. It is down roughly 3.5 percent against the
greenback this week.
Skepticism that Greece can deliver on its promises of tough
austerity measures dominated the markets.
"European contagion is really the name of the game. That's
all we're watching," said Rick Klingman, managing director of
Treasury trading at BNP Paribas in New York.
German bund yields hit a record low, while the cost of
protecting Portuguese government debt against default hit a
record high after credit rating agency Moody's Investors
Service said Portugal was on review for a possible downgrade.
U.S. stocks were weaker on the contagion fear, taking
little notice of a private sector report showing gains in the
U.S. labor market for the first time since January 2008.
[]
In mid-morning trade, the Dow Jones industrial average
<> fell 26.00 points, or 0.24 percent, at 10,900.77. The
Standard & Poor's 500 Index <.SPX> lost 4.23 points, or 0.36
percent, at 1,169.37. The Nasdaq Composite Index <>
dropped 18.69 points, or 0.77 percent, at 2,405.56.
The FTSEurofirst 300 <> index of leading European
shares pared losses slightly on strong results from market
bellwethers like Societe Generale <SOGN.PA>. The index however
closed down 0.8 percent, near a nine-week low.
In Athens, striking public sector workers challenged
Greece's bailout-for-austerity deal. Three people were killed
when protesters set a central Athens bank ablaze.
[]
Policymakers, including International Monetary Fund chief
Dominique Strauss-Kahn and the European Central Bank's Axel
Weber, warned of the dangers of contagion to other high-debt
euro zone nations. []
Portuguese credit default swap (CDS) prices surged to 407
basis points from 344 basis points, according to CDS monitor
CMA DataVision. The firm said the levels implied a default rate
of 29.6 percent.
Greece's CDS levels reached a record high of 850 basis
points from 764.5 basis points at the New York close on
Tuesday.
The two-year Schatz yield <EU2YT=RR> was spurred to a fresh
record low of 0.569 percent. The Schatz, a short-dated euro
zone government bond benchmark, was introduced in the early
1970s.
The 10-year Portuguese/German government bond yield spread
<PT10YT=TWEB><DE10YT=TWEB> widened to 310 basis points, a euro
lifetime gap.
The equivalent Spanish spread <ES10YT=TWEB> widened to 136
bps, also a euro lifetime gap.
The price on benchmark 10-year Treasury notes <US10YT=RR>
was up 22/32 for a yield of 3.51 percent, down from 3.60
percent late Tuesday and the lowest intraday level since early
February.
World stocks as measured by MSCI <.MIWD00000PUS> fell 1.1
percent to their lowest since early March, while the more
volatile emerging equities index <.MSCIEF> dropped 2 percent.
Asian markets also weakened. Shanghai's key index <>
slid as much as 2 percent to its lowest in seven months,
suffering from Beijing's weekend moves to tighten policy.
Japan's markets have been closed this week, and are
scheduled to reopen on Thursday.
Oil extended losses, falling $2.10, or 2.6 percent, to
$80.64 per barrel, a day after its steepest one-day percentage
loss in three months, on rising inventories and a firm dollar.
[]
Spot gold <XAU=> rose $1.50 to $1,172.60 an ounce despite
strength in the greenback.
(Additional reporting by Emily Flitter in New York, Carolyn
Cohn and Neal Armstrong in London; editing by Jeffrey Benkoe)
