Banks and commodity stocks were suffering this morning but the FTSE 100 held onto its weekly gains and remained above the 6,000 mark, holding level at 6,016.
A potential stand-off between the European Central Bank and the credit ratings agencies over the definition of default for Greece was causing investor unease.
According to reports, a senior official said yesterday that the European Central Bank would use the best credit rating available for Greek debt from the three big ratings agencies, Standard & Poor’s, Moody’s and Fitch.
When the ECB lends money to Greece it does so using the Greek debt as collateral. But the bank is not allowed to use defaulted debt as collateral. So if the credit ratings say that rolling over debt is a default it could mean that a decision to lend more cash to Greece would be illegal. Fitch has said it may call a rollover a default but Moody’s has yet to make its stance clear.
Michael Hewson at CMC markets said: ‘Yesterday’s comments by an ECB official that the central bank would ignore a default rating recommendation unless there was a consensus across the board from all ratings agencies could be seen as trying to drive a wedge, or delay the inevitable with Moody’s declining to comment, while both S&P and Fitch have made their positions clear.
‘There is a concern that such an action by the ECB would stretch their credibility to breaking point. For now however that is a decision they won’t yet have to make.’
Other institutions will also have to decide on whether a rollover constitutes a default, such as the Credit Default Swap market (CDS) which is the equivalent of an insurance policy against bonds defaulting. Some investors may want CDSs to pay up if the rollover goes ahead.
The biggest faller on Britain's blue chip index was Associated British Foods (ABF.L) that dropped 1.3% or 14p to £10.72 but otherwise banks and miners were the key losers.
Commodity stocks were led down by Xstrata (XTA.L), down 1% or 14p at £13.79 as metals prices fell. Copper dropped 0.4% to $4.28 per lb while Brent Crude fell 0.75% to $110.5 per barrel and gold gained 0.8% to trade at $1,494.
The main risers included Reckitt Benckiser (RB.L), which added to yesterday’s gains on the back of speculation about a £35 billion bid for the company. The household goods firm added 1.35% or 47p to £35.35. Oil services firm John Wood Group (WG.L) also added to gains it made on Monday with another 1% or 7p to 701p.
Yesterday the firm completed a £1 billion cash return and saw a target price rise from analysts at Barclays Capital. On Friday Goldman Sachs upgraded the firm to 'buy' from 'neutral'.
UK investors were waiting for the publication of the purchasing managers index on services sector activity, which was expected to fall slightly from 5.38 to 5.36.
European Markets fell with the German DAX down 0.17% to 7,430 and the French CAC 0.3% lower to 3,990.
Asian banks were hit after Moody’s said China’s local government debt burden may be higher than previously estimated at $540 billion, which could see banks that lent the money at greater risk. In Japan the Nikkei was level at 9,972 and in Hong Kong the Hang Seng fell 0.15% to 22,735.