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Dow falls more than 300 points as European fears grow

New York Stock Exchange Fears that the European debt crisis may be coming to a head drove down stock markets around the world.

The market declines were driven largely by reports out of Germany that indicated leaders there are preparing for Greece to default on its bonds but are struggling to reach a consensus on how to handle the problem.

The news sent the German stock market down 4.1% by the end of the day Friday, similar to the declines elsewhere in Europe. Leading U.S. stock indexes followed, with the Dow Jones industrial average experiencing its worst day in more than three weeks, wiping out gains made earlier in the week.

“Now people aren’t talking about a recession here in the U.S.,” said Anthony Conroy, head equity trader at BNY ConvergEx. “Now we’re talking about a global recession.”

The Dow finished the day down 303.68 points, or 2.7%, to 10,992.13. The broader Standard & Poor’s 500 index fell 31.67 points, or 2.7%, to 1,154.23. Both indexes have fallen five of the last six weeks.

President Obama had hoped to lift some of the economic gloom with his speech to Congress on Thursday night promoting an $447-billion economic stimulus plan that would cut taxes and increase spending on infrastructure.

The speech, though, was immediately met with questions about whether it can pass a Republican-controlled House of Representatives, and whether it is even big enough to have an impact if it does pass.

Investors had also held out hope that Federal Reserve Chairman Ben S. Bernanke would provide some hope for stimulus in a speech he gave Thursday, but he stepped back from making any firm commitments.

“Presumably they have shot their big cannons and what they have left are a few handguns,” said Bernie McGinn, president of McGinn Investment Management. “People would like to have cannons now.”

By Friday morning, most eyes had shifted to Europe, where investors were buying up Greek bonds at prices that appear to assume a default is coming.

The European Central Bank has been purchasing Greek bonds in an effort to help support the Greek government as it implements an austerity program.

On Friday morning, though, the bank announced that its No. 2 official, Juergen Stark, was resigning, reportedly due to his disagreement with the bond-buying program.

Shortly after that announcement, reports indicated that Germany is drawing up a plan to shield its banks in case Greece does default on its bonds.

In July the European Union came out with a $220-billion plan to help Greece avoid default, but political disagreements have thrown into doubt whether the second dose of this aid will be delivered to Greece.

The failure to deliver the aid probably would force the Greek government into default.

The specter of a Greek default is so feared because many European banks hold vast stores of sovereign bonds, and could face difficulties like those encountered by U.S. banks in 2008 when mortgage-backed securities lost their value.

“This is Europe’s 2008,” said Kim Caughey Forrest, a portfolio manager at Fort Pitt Capital Group.

RELATED:

Obama pitches $447-billion jobs plan

Obama jobs plan spurs cautious hope among small businesses

Fed Chairman Ben S. Bernanke doesn't tip hand on more stimulus

-- Nathaniel Popper

Twitter.com/nathanielpopper

Photo: The New York Stock Exchange. Credit: Spencer Platt / Getty Images

 
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