Greece's exploding debt crisis eclipsed all else on financial markets on Wednesday, knocking down global stocks and pushing the euro for a time to a one-year low against the dollar.
A day after ratings agency Standard & Poor's downgraded Greek government debt to junk status, the 2-year Greek bond yield rose above 22 percent, 10-year yields were over 900 basis points above German ones, and Greece's Capital Markets Commission banned stock short-selling.
The chances of a default by the Greek government are increasing not by the day but by the hour. If the IMF and European governments don't come up with something quickly, then I see the market going down further quite rapidly, said Koen De Leus, economist at KBC Securities.
He said the Greek crisis was clouding everything else on financial markets.
Investors are starting to react emotionally. In the current environment, it's very difficult to impress with better-than-expected earnings, he said.
World stocks as measured by MSCI were down 0.9 percent, having lost more than 2 percent on Tuesday. The more volatile emerging market index <.MSCIEF> lost 1.4 percent to add to a similar fall in the previous session.
European shares hit a five-week low a day after recording their biggest one-day fall in five months.
The FTSEurofirst 300 <.FTEU3> index of top European shares was down 0.7 percent. It tumbled 3.1 percent on Tuesday.
The crisis, which has been brewing for months but is now entering what Deutsche Bank has called a death spiral, prompted European Central Bank Executive Board member Juergen Stark to call for action by European governments.
The onus is now on governments to ensure that the crisis that initially affected the financial sector, and subsequently the real economy, does not lead to a full-blown sovereign debt crisis, he said.
ECB President Jean-Claude Trichet and IMF chief Dominique Strauss-Kahn will brief German political leaders on the latest plans to help Greece.
The euro, whose stability has been brought into question by the crisis, hit a one-year low against the dollar in Asian trade after falling 1.5 percent on Tuesday.
It later moved slightly back into positive territory for the day as currency traders took stock of the overnight moves and struggle to work out how to price in a currency from a monetary bloc that now includes junk status.
It was at $1.3189.
This is all about the downgrades to Greece and Portugal. Without a solution to internal European problems then the euro downside will remain, said Dag Muller, strategist at SEB in Stockholm.
He added the euro looked set to fall toward $1.29, although it is likely to see some short-covering and brief bounces.
In fixed income markets, the premium investors demand to hold Greek government bonds was at its highest since late 1996.
Traders reported attempts at forced selling by accounts that could not hold junk rated paper, although no trades were executed.
Portuguese/German 10-year government debt spreads widened to 310 basis points, a record for the euro's lifetime.
(Additional reporting by Atul Prakash and Jessica Mortimer, editing by Mike Peacock)