LONDON MSCI, the most widely used equity index provider, prompted market fears about both Greece and Egypt on Wednesday, after demoting the former and then raising concerns about getting money out of the latter.
MSCI redesignated Greece an emerging market late on Tuesday, 12 years after its promotion from the category, assigning it a tiny 0.3 percent weighting - far less than it had when last in the emerging index.
In a follow-up conference call on Wednesday, an MSCI official then triggered worries about Egypt when he said the firm had had reports of investors having difficulties with currency when repatriating money out of Egypt.
Greek stocks fell sharply and the bond yield curve inverted further, meaning longer term debt returned less than shorter term, a sign of investor fear about Athens' ability to pay.
Egypt's stock market fell more than 2.5 percent.
The Greek move, which means pension funds and more cautious investors will have to move out of the Athens stock index .ATG, left Greece with less weight in MSCI's emerging market index .MSCIEF than the 0.4 percent index weight assigned to Qatar and the United Arab Emirates.
Those two are former frontier markets that MSCI will include in the emerging markets index from mid-2014 <ID:L2N0EN22G>.
It is also far smaller than the 5 percent share Greece had held before its 2001 promotion, making it one of the smallest constituents of the emerging markets index .MSCIEF
MSCI, whose indices are tracked by $7 trillion worldwide and $1.3 trillion in emerging markets alone, nonetheless said less stringent entry criteria for the emerging index meant that a number of Greek companies would be eligible to join, as opposed to just two that are in the developed index.
"We would at the time of change, which would be November, apply the new threshold for inclusion.. It will become a broader, more representative index," MSCI managing director Remy Briand told reporters.
"Whether it benefits the equity market or not...it's hard to gauge whether there will be more interest," he said.
Greece at present has a tiny 0.01 percent weight in the $29 trillion market cap developed index .MIWO00000PUS but the relatively small size assigned to it effectively dash any hopes the country would benefit from being a big fish in a small pond.
Earlier this year Russell Indexes which is tracked by $3.9 trillion, also downgraded Greece. A third major provider, FTSE, has it on review for switch to emerging markets.
The Athens stock market .ATG fell 1 percent on the day and 10-year Greek bond prices fell more than the 30-year issue, continuing a recent sell off.
"There are some pension funds whose mandates are to invest in developed markets only. They will be forced sellers. That will more than offset buyers because there is so much more money tracking the developed index," said Patrick Armstrong, a fund manager at Distinction Asset Management in London.
MSCI's Briand said his firm was being told by clients about problems with currency when repatriating money out of Egypt, where political turmoil has deterred foreign investors.
"We have no proposal to change anything in the index but we have investors giving us (this) feedback," he said. "We have highlighted that the situation in Egypt regarding the currency is being monitored very carefully."
The firm said in a statement that it may be forced to launch a public consultation with the investment community on a potential exclusion of the MSCI Egypt Index from the MSCI Emerging Markets Index were the situation to worsen.
Qatari and UAE stocks meanwhile were celebrating their upgrade to emerging markets from the less liquid and smaller frontier index, with the Doha bourse rising to its highest since September 2008 .QSI.
Despite carrying large weightings of 15 and 12 percent respectively in the frontier index, joining the more liquid emerging index is expected to bring more inflows.
Morocco on the other hand was designated a frontier market.
While an upgrade for UAE was widely expected, fuelling a blistering 50-percent rally since the start of 2013, Qatar had been seen as less likely because of limits on foreign ownership and relatively small free floats of shares.
(Additional reporting by Natsuko Waki in London; Nadia Saleem and Andrew Torchia in Dubai Editing by Jeremy Gaunt.)