* 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
(Updates with comment, prices, Europe close)
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 turned deadly and Moody's warned Portugal's
debt could be downgraded.
Markets retraced ground from the day's lows but were still
weaker in midday U.S. trade.
German bond yields surged on investor fears that a massive
aid package would not be sufficient to ensure other fiscally
weak euro-zone nations don't spiral down. U.S. Treasury prices
drifted down from their highs but were still up on the day.
The euro lost 0.72 percent to $1.2887 <EUR=>, its lowest
point since mid-March 2009. 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 midday New York trade, the Dow Jones industrial average
<> fell 30.31 points, or 0.28 percent, at 10,896.46. The
Standard & Poor's 500 Index <.SPX> lost 3.53 points, or 0.30
percent, at 1,170.07. The Nasdaq Composite Index <>
dropped 16.66 points, or 0.69 percent, at 2,407.59.
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 0.95 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.
"What we're seeing is a complete sea change in the market
assessment of risk," said Societe Generale economist James
Nixon.
"Any country running what is obviously an unsustainable
fiscal trajectory, and people ultimately don't want to be
holding their debt...if you think there's a chance you won't
get your money back."
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.
Investors bought the government bonds on the Greece fear
factor, ignoring a report that said euro zone's economic growth
should be stronger in 2010 than previously thought.
[]
The price on benchmark 10-year Treasury notes <US10YT=RR>
was up 8/32 for a yield of 3.56 percent, down from 3.60 percent
late Tuesday.
World stocks as measured by MSCI <.MIWD00000PUS> fell 0.93
percent to their lowest since early March, while the more
volatile emerging equities index <.MSCIEF> lost 1.81 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, losing $1.73, or 2.09 percent, to
$81.01 per barrel, a day after its steepest one-day percentage
loss in three months, on rising inventories and a firm dollar.
Safe-haven buying sent spot gold prices higher <XAU=>. The
precious metal gained $1.50 to $1,172.60 an ounce despite
strength in the greenback.
(Additional reporting by Emily Flitter in New York, Carolyn
Cohn, Neal Armstrong, George Matlock, Kirsten Donovan in
London)
(Editing by Theodore d'Afflisio)
