Fears for Greece bring tremors to the markets

The FTSE 100 Index – which shed 2.6 per cent on Tuesday – lost another one per cent at one point yesterday before pulling back some of the ground to finish 0.3 per cent lower at 5586.6.

Markets were focused throughout the day on efforts to secure a bailout package for the desperate Greek economy as sovereign default fears spread across the globe.

Ratings agency Standard & Poor's – which slashed Greek debt to junk status on Tuesday and downgraded Portugal's – added to concerns by lowering its rating on Spain as the market closed in London, predicting an "extended period" of subdued growth.

And Jonathan Loynes, of Capital Economics, said Greece could be a "sovereign equivalent" of financial services firm Lehman Brothers, which triggered a meltdown with its collapse in September 2008.

"The crisis in Greece crystallises the worries about the dire state of the public finances in many countries in the same way that the collapse of Lehmans raised fears of a domino effect throughout the financial system," he warned.

Germany, the International Monetary Fund and the European Central Bank were in talks yesterday over financial aid to Greece. German finance minister Wolfgang Schaeuble said that if Athens were to agree new austerity measures, Germany could agree its contribution to a financial aid package by the end of next week.

The European Commission tried to calm markets after expressing full confidence in Greek plans to revamp its dismal public finances and ruling out a restructuring of its debts.

But IG Index chief market strategist David Jones said: "While there has been much political wrangling over what to do about the worsening situation in Greece, one thing is clear – the markets will not wait for politicians."

France's CAC 40 and Germany's Dax indices lost 1.5 per cent and 1.2 per cent as worries persisted, although Wall Street was flat as decent corporate earnings helped to offset nerves on the Greek situation.

In London, heavyweight stocks Royal Dutch Shell and BP limited the damage for the FTSE 100 after posting strong results this week.

The oil giants together account for a large chunk of the market and both were up more than two per cent yesterday.

But financial stocks were in the spotlight. Royal Bank of Scotland and fellow part-nationalised lender Lloyds Banking Group both lost around five per cent early in the session, but were later down about two per cent.

Analysts at Credit Suisse said UK banks had "relatively limited" exposure to Greece and Portugal, both in terms of loans and government debt.

But concerns over contagion were heightened after the latest S&P downgrade which saw Spain's debt rating lowered by one notch to AA.

"We now believe that the Spanish economy's shift away from credit-fuelled economic growth is likely to result in a more protracted period of sluggish activity than we previously assumed," Standard & Poor's credit analyst Marko Mrsnik said.

Other countries with high levels of debt, including Italy, Spain – and the UK – have come under scrutiny in the wake of the Greek crisis.