China lashes out against U.S. bill aimed at currency manipulators

China on Tuesday blasted a proposed U.S. bill that would punish countries for undervaluing their currency by saying it would undermine the global economy and potentially lead to a trade war.

China’s central bank and ministries of commerce and foreign affairs released separate statements criticizing the bill, which is being championed by Democratic lawmakers who hope to protect U.S. jobs by slapping tariffs on Chinese imports.

Such a move “seriously violates rules of the World Trade Organization and obstructs China-U.S. trade ties,” said Foreign Ministry spokesman Ma Zhaoxu in a statement posted on the Chinese government’s official website.

China’s central bank said the attention given to China’s currency, known as the yuan or renmenbi, deflects Washington from the real issues plaguing the American economy.

“The yuan bill passed by the U.S. Senate will not solve its problems, such as insufficient savings, high trade deficit and high unemployment rate, but it may seriously affect the whole progress of China's reform of its yuan exchange rate regime and may also lead to a trade war, which we would not like to see,” the bank said on its website, according to a translation by Reuters.

The yuan’s value is set daily by China’s central bank, not by free markets. Critics of China’s currency policy contend the yuan is undervalued by as much as 40% to give the world’s second-largest economy an unfair trade advantage.

Labor advocacy groups in the U.S. such as the Economic Policy Institute say this has fueled a trade deficit with China that has cost Americans 2.8 million jobs between 2001 and 2010.

Debate still rages over whether targeting China’s currency will return jobs to the U.S., as manufacturing could shift to another low wage country such as Vietnam.

The yuan has edged up about 10% against the dollar since it was de-pegged from the greenback in June, 2010. Experts say the central bank is in favor of faster appreciation to combat inflation, which is running at a three-year high. A stronger yuan would make imports cheaper.

But the Ministry of Commerce, which oversees trade, and officials in coastal manufacturing provinces are against more aggressive appreciation for fear it will bankrupt factories, sap taxes and leave millions out of work.

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-- David Pierson  

twitter.com/dhpierson

Photo: China blasted a proposed U.S. law that would slap tariffs on countries that undervalued their currency. Above, a bank clerk counts notes. Credit: Zhong Min / EPA

China's central bank chief says policy to remain stable

 

 

 

 

 

The head of China's central bank said the world's second-largest economy would continue to tackle inflation and resist major policy changes that could provoke a so-called hard landing.

"We will not introduce macroeconomic policies that will trigger a 'hard landing,'" said People's Bank of China Governor Zhou Xiaochuan in an interview published Monday in the China Business News. "Instead, we'll let the policies work for a period of time to make sure the economy 'soft lands,' and at the same time, maintain stable and sustainable growth."

Zhou added that policies would remain flexible given the uncertainty of the global economy, suggesting China will use currency appreciation as a tool to dull inflation.

The central bank set the yuan Monday at its highest level against the dollar since July 2005, at 6.3735.

Zhou's remarks decrease the chances that China will seek a new round of fiscal tightening in the coming months. But it also reinforces the belief that Beijing will steer clear of loosened monetary conditions anytime soon.

The latter may have spurred the sell-off of shares in China on Monday. The Shanghai Composite Index, which tracks the country's larger stock exchanges, fell 1.6% to 2,393.18 – its lowest point in more than 14 months.

After hitting a 37-month high in July, China's inflation rate eased slightly in August. Some economists believe that inflation has peaked in China, though the chances of it staying persistently high remain strong.

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-- David Pierson
Twitter.com/dhpierson

Photo: China's Central Bank Governor Zhou Xiaochuan meets with foreign finance ministers during the IMF/World Bank meetings in Washington on Sept. 22. Credit: Manuel Balce Ceneta / Associated Press

U.S. dollar is a weakling no more

Remember all that talk about how the Federal Reserve was killing the dollar by printing too many of them?

Suddenly, the Fed is the buck’s BFF.

The dollar has been roaring against many other major and minor currencies over the last month, a trend that accelerated this week as global investors were spooked yet again by recession fears.

For now, the dollar is back in its traditional role as a haven in times of market and economic turmoil. And the Fed helped by opting not to launch a new money-printing campaign when policymakers met on Wednesday.

Instead, the Fed said it would try to pull longer-term interest rates lower by shifting its massive Treasury bond portfolio from shorter-term securities to longer-term ones.

At the same time, the Fed warned of “significant downside risks to the economic outlook.” That was enough to trigger another rush of global money into the greenback.

The DXY index (charted at left), which measures the dollar’s value against six other major currencies, soared 1.4% on Thursday to its highest level since February. The index has risen 6.3% since Aug. 29.

The euro has dropped 7.2% vs. the dollar since Aug. 29, to $1.346 on Thursday, the lowest since January.

The buck’s gains against some currencies have been far more dramatic. Compared with three weeks ago, one dollar now buys 11% more South Korean won, 13% more Mexican pesos and 20% more Brazilian reals. It buys 26% more Swiss francs than six weeks ago.

With the Fed’s meeting out of the way, “The market is no longer worrried that [policymakers] will undercut the nascent dollar recovery anytime soon,” Alan Ruskin, currency strategist at Deutsche Bank Securities, said in a report Thursday.

Meanwhile, the outlook for the euro gets bleaker, he said, amid expectations that the European Central Bank will have to continue pumping new money into the continent’s deeply troubled financial system.

Who loves a stronger dollar? Any American business or leisure traveler heading overseas, of course.

But the dollar’s resurgence is bad news for U.S. exporters because it has the potential to make their products more expensive for foreign buyers. That’s another jab to the stock market’s gut this week as shares of multinationals such as Caterpillar, Boeing and Colgate-Palmolive get clobbered.

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-- Tom Petruno

Confidence in Europe craters, and global markets pay the price

Friday is turning out to be a day to sell nearly everything, and ask questions later, as fears balloon again that Europe could lead the planet into another recession.

Stock markets have tumbled worldwide, dragging most commodities lower as well. The Dow Jones industrial average was off 192 points, or 1.8%, to 10,591 at about 11:40 a.m. PDT.

Even gold was down at one point in the session, although it has snapped back to $1,233 an ounce, up from $1,229 on Thursday. The metal jumped to an all-time high on Wednesday.

Just five days after the European Union announced a plan to provide nearly $1 trillion in loans to its weakest debt-challenged states, if needed, markets are casting a huge vote of no-confidence in the euro-zone.

The euro itself, which has been sliding all week despite Sunday’s rescue announcement, plummeted as low as $1.236 on Friday, the weakest since October 2008 and down from $1.253 on Thursday.

Europe’s leaders are doing little to bolster confidence in the future of the currency. The Spanish newspaper El Pais reported that French President Nicolas Sarkozy threatened to pull out of the euro unless German Chancellor Angela Merkel agreed to back the bailout plan at last weekend’s summit in Brussels.

Stocks plunged across Europe on Friday, although major indexes stayed above their lows reached a week earlier, before the rescue was hammered out.

The Spanish stock market plummeted 6.6%, Italy dropped 5.3%, France lost 4.6% and Germany was down 3.1%.

More troubling, perhaps, is that market yields on euro-zone government bonds jumped after declining most of the week. The latest bond sell-off is a direct challenge to the European Central Bank, which this week began buying government bonds for its own account in an attempt to keep yields suppressed.

The yield on Greek two-year notes rose to 7.27% from 6.87% on Thursday, though it remained below its panic peak of 18.27% a week ago. Portuguese two-year note yields rose to 2.48% from 2.30% Thursday.

Investors and traders also are dumping commodities. Near-term crude oil futures were down $2.79 to $71.61 barrel, the lowest since February.

In part, commodities are taking a hit as the dollar zooms at the euro’s expense. The greenback is the day’s big winner, with the DXY index of the dollar’s value against six major currencies up nearly 1% to its highest in more than a year.

And once again, when in doubt, some investors are pumping their cash into U.S. Treasury bonds. The two-year T-note yield has fallen to 0.78% from 0.83% on Thursday.

For many beleaguered investors, Friday’s closing bell can’t ring soon enough.

-- Tom Petruno

Photo: The euro symbol outside the European Central Bank's headquarters in Frankfurt, Germany. Credit: Thomas Lohnes / AFP / Getty Images

New slump in euro tests Europe's resolve: Do they really want a stronger currency?

Europe’s rescue plan for its weakest member states stabilized the continent’s stock and bond markets this week. But if the goal was to stop the euro’s slide, the rescue is fizzling.

The currency slumped on Thursday for a third straight session, ending in New York at a new 14-month low of $1.253, down from $1.263 on Wednesday.

The euro had jumped as high as $1.309 on Monday from $1.276 on Friday after the European Union announced a plan to lend up to $1 trillion to struggling euro-zone countries over the next three years, if they can’t raise needed cash in the bond market.

But the rebound didn’t hold, and the currency began sliding again by late Monday. The euro’s fall on Thursday -- and the flip side of that decline, which is the dollar’s strength -- was cited by some stock traders as a trigger for the late-afternoon slump in U.S. equities. The rising dollar could hurt U.S. multinational companies and exporters as foreign earnings translate into fewer dollars.

The Dow industrials ended down almost 114 points, or 1.1%, to 10,782.95.

Euro weakness also can be murder on Americans’ foreign-stock mutual funds, if those portfolios are heavy with euro-zone stocks (which many are). German stocks, for example, are up nearly 5% in euros year to date -- but are down 8.2% in dollar terms.

When they announced their rescue plan on Sunday, European leaders talked about the importance of defending the 11-year-old euro. But they also know that allowing the currency to slide further could help their economy longer-term by making their exports cheaper. Germany, in particular, stands to benefit from a falling euro because of its huge export business.

Brian Dolan, chief currency strategist at Forex.com in Bedminster, N.J., noted that the $1.25 area is where the euro bounced in late 2008 and again in March 2009. So if the Europeans truly want to defend their currency, this could be a crucial moment.

The fundamentals seem to be stacked against the euro. A currency tends to rally when the underlying economy is improving. For Europe, growth was meager in the first quarter and may be harder to come by in the second half of this year if Greece, Portugal, Spain and other deficit-ridden nations follow through on austerity promises.

What’s more, Europe’s debt woes are likely to mean the European Central Bank won’t be in any hurry to raise interest rates. Low rates tend to undermine a currency’s appeal.

“I think we’re going lower on the euro,” Dolan said. He figures the currency will slide to about $1.16 by year’s end, though he says it could get there a lot sooner.

But Dan Katzive, currency strategist at Credit Suisse in New York, thinks the bad news for the euro is nearly all out, unless euro-zone government bond yields resurge. He sees the currency stuck in a trading range of $1.25 to $1.30 for the time being.

In tandem with the European Union’s lending plan, the European Central Bank this week began buying euro-zone government bonds for its own account to calm default worries and push yields lower. By Thursday the yield on the Greek government’s two-year note had fallen to 6.87%, down dramatically from 18.27% last Friday.

That part of the rescue, at least, so far is working as planned.

-- Tom Petruno

Perfect setup for a gold rally: Wall St. 'flash crash' meets rising mistrust of paper currencies

Anyone in the business of pushing gold as an investment shouldn't have had to work very hard this week.  Wall Street's "flash crash" and the European Union's largess did the heavy lifting.

Gold surged Wednesday to another all-time high, egged on by more chatter that Europe’s rescue plan for its weakest states is another big step down the road to severe inflation or debasement of paper currencies, or both.

This is the easiest way for gold bulls to pitch the metal, of course, because it’s basically like selling insurance: You aren’t sure you’ll need it, but it seems prudent to have it.

And after last week’s stock market flash crash, prudence is all the more in vogue. That’s a blessing for anyone hawking the yellow metal, which can’t offer interest or dividends to investors but can promise to always keep the same weight and gleam, and always be worth something -- unlike, say, General Motors stock.

Near-term gold futures in New York jumped $22.80, or 1.9%, to $1,242.70 an ounce on Wednesday, the second consecutive record high. Silver and platinum also rallied, though they remain below their recent price peaks set in 2008.

Gold now is up 13.5% year to date, more than twice the 5.1% gain of the Standard & Poor’s 500 index.

Governments have printed massive amounts of money since 2007 to rescue their economies and financial systems. The European Union on Sunday committed to doing more of the same, agreeing to fund almost $1 trillion in loans to struggling member countries if they can’t raise needed cash in the private bond market.

The latest gold market rally represents, in effect, some number of investors worldwide voting their disapproval of the EU’s plan -- or at least, voting their fear of its consequences.

J. Kyle Bass, a Dallas hedge fund manager who made a fortune betting against mortgage-backed securities in 2007, has been warning clients for the last year that the next catastrophe could be a global hyperinflation rooted in governments’ unprecedented money creation.

In a letter to clients on Tuesday, Bass sounded more convinced than ever that serious inflation is ahead. From the letter:

The pattern is now set. This is exactly how very smart people meeting together in order to “solve” a debt crisis frequently (and now permanently, it appears) mistake a solvency crisis for a liquidity crisis. From now on, it seems everything will be deemed to be a liquidity crisis that will be met with more “bailouts” and debt-financed spending. This will eventually break traction in a violent way and facilitate severe inflation or even hyperinflation.The one thing the EU taught us this weekend is that paper money will be worth less (maybe much less) in the future.

What to do? “We increased our holdings of gold on Monday morning,” Bass said in the letter, although he didn’t spell out how he owns the metal, or how much he owns.

Whether serious inflation is coming still is a matter of great debate. There are plenty of people who see a greater likelihood of deflation. But if you have a growing distrust of paper currencies, for whatever reason, the case for gold is a simple one to make; the only question is whether patience might net you a better entry point.

Not surprisingly, gold demand in Europe reportedly has surged this week as the euro has continued to sink, eroding euro-zone consumers' purchasing power. The currency fell to $1.263 on Wednesday, down from $1.269 on Tuesday. The euro briefly rallied to $1.309 on Monday after the EU rescue plan was announced, before fading again. It has lost 16% of its value against the dollar since Nov. 25, while gold has risen 4.6% in dollars since then.

What is gold really worth? That’s the problem: It can’t be valued in the same way that a stock or bond can be valued, because it doesn’t produce cash flow. If you're buying gold as insurance, the cost obviously is a lot steeper than it was a few years ago. But if it turns out that you didn't need the insurance, and gold tumbles or languishes, presumably the rest of your portfolio would make up for it (as during the 1980s and '90s).

If a fair price for gold is unknowable, investors at least can count on the metal's historical function as hard money that will always have some intrinsic value.

Paper currencies may come and go, and likewise companies, but gold is forever.

-- Tom Petruno

 

Europe's 'relief rally' wanes -- and gold hits a new high

Markets’ relief over the European Union rescue plan for the continent’s weakest states faded somewhat on Tuesday, leaving European stock markets -- and the euro -- mostly lower.

Meanwhile, gold had a big day: It jumped to a record closing high, topping $1,219 an ounce, as some investors and traders continued to flock to the metal as an alternative to paper currencies, particularly the euro.

The bailout package, which offered nearly $1 trillion in loans for debt-ridden European countries over three years if they can’t get better funding from the bond market, triggered a huge rebound Monday in battered European stock and bond markets.

The good news Tuesday was that market interest rates continued to fall on government bonds of Greece and Portugal, the two countries considered to be most likely to tap bailout loans. Greece’s two-year note yield slipped to 7.02% from 7.53% on Monday. The yield had rocketed to 18.27% on Friday.

Portugal’s two-year note yield fell to 2.26% Tuesday from 2.95% on Monday and 6.05% on Friday.

In tandem with the rescue package, the European Central Bank on Monday began buying bonds of euro-zone countries for its own account, a move aimed at pushing bond yields down.

European stock markets, however, gave back some of Monday’s gains. The Spanish market fell 3.3% after rocketing 14.4% on Monday. The French market eased 0.7% after soaring 9.7% on Monday.

A lack of confidence in the rescue package -- or maybe fear of intended or unintended consequences from the plan -- has shown up most clearly in continued downward pressure on the euro.

The currency rose as high as $1.309 on Monday from $1.276 on Friday as money flooded back into European financial markets. But it fell back to $1.28 by Monday’s close in New York and on Tuesday lost more ground, to $1.273 by about 11 a.m. PDT.

What’s bad for the euro is great for gold: Near-term gold futures in New York jumped $19.50 to end Tuesday's session at $1,219.90 an ounce, an all-time closing high. That topped the previous record closing high of $1,217.40 reached on Dec. 3. The metal, up 11% year to date, continued to soar in electronic trading late Tuesday, reaching $1,232 an ounce.

Gold often surges when people are fleeing most other markets in fear. That happened during last Thursday’s wild trading on Wall Street. But now gold is hitting a new high even as U.S. stocks are rallying and as the dollar, the metal’s archrival, rises against the euro.

“I think it shows you this is more than just a ‘flight-to-quality’ move,” said Adam Klopfenstein, a market strategist at commodities trading firm Lind-Waldock in Chicago. “You’ve got more than one camp that wants to buy gold now.”

-- Tom Petruno

Photo: Frantzesco Kangaris / Bloomberg News

European stocks soar and bond yields dive on rescue plan, but euro rally runs out of gas

Europe’s shock-and-awe rescue plan to keep its financial union intact is having the effect that policymakers were hoping for, sending stock and bond values rebounding dramatically Monday.

But there already is one sign of doubt creeping in: The euro currency is trading well off its highs reached earlier in the day.

The European Union, the International Monetary Fund and the European Central Bank late Sunday hashed out a massive bailout plan that will include nearly $1 trillion in loans and loan guarantees for the weakest countries in the euro-zone.

The goal: persuade global investors that debt-ridden countries, including Greece, Portugal and Spain, won’t blow up and take the rest of Europe down with them.

For its part, the European Central Bank agreed to directly buy the bonds of euro-zone countries, stepping in as the lender of last resort -- just as the Federal Reserve did last year in the U.S. mortgage-backed-securities market.

The EU aid package and the ECB’s bond-purchase commitment triggered a massive rush of money back into stocks and bonds, which had been hammered for the last three weeks. Many traders who were “short” these markets no doubt were trying to cover those bets Monday.

Spain’s main stock index soared 14.4% for the day to close at 10,351. But after last week’s 13.8% plunge, Monday’s rebound still left the Spanish market below its level on May 3 -- and down 13% year to date.

Stocks were up 11.3% in Italy, 9.1% in Greece and 5.3% in Germany.

In the bond market, the annualized yield on the Greek government’s two-year notes dived to 7.53% from 18.27% on Friday. Portugal’s two-year note yield tumbled to 2.95% from 6.05% on Friday.

Still, Moody’s Investors Service put a damper on the markets’ party by warning that it would probably be lowering its credit ratings for Greece and Portugal in the next month or so, despite the rescue plan.

The euro, which had fallen to a 14-month low of $1.262 on Thursday, shot as high as $1.309 in Europe on Monday. But in U.S. trading, the euro had come well off its highs by about 11:15 a.m. PDT, when it was trading at $1.282.

A popular view in currency markets is that the rescue buys time for the battered euro, removing the immediate risk of a further downward spiral in European financial markets. Longer term, however, the euro’s outlook remains dicey.

Alan Ruskin, head of currency strategy at RBS Securities in New York, said the huge rescue program exposed Europe’s monetary union as “hopelessly compromised.” Long-term, that is likely to give big investors such as central banks and sovereign wealth funds “pause for thought when considering reserve alternatives to the U.S. dollar,” he said.

-- Tom Petruno

Photo: German stock traders in Frankfurt on Monday. Credit: Mario Vedder / Associated Press

European Central Bank agrees to buy euro-zone governments' bonds in attempt to halt debt crisis

The European Central Bank chose the "nuclear option" on Sunday, agreeing to directly buy government bonds of euro-zone countries in an attempt to keep the continent's harrowing debt crisis from spreading.

The ECB's decision, announced in tandem with a massive new lending and loan-guarantee program from the European Union, is policymakers' most aggressive response yet to the financial debacle that by last week was threatening to engulf the continent's banking system.

The moves had the desired effect, sending the battered euro currency surging in Asian trading and lifting Asian stock markets as well.

In a statement, the central bank said that in view of "current exceptional circumstances prevailing in the market," it would "begin to conduct interventions in the euro area public and private debt securities markets to ensure depth and liquidity in those market segments which are dysfunctional." It didn't put a value on the amount of purchases it's willing to make.

If it chooses, the ECB now could become a buyer of Greek, Spanish and Portuguese government bonds -- securities that have increasingly been shunned by private investors in recent months on deepening fears that the governments might be unable or unwilling to pay their creditors in full. That has pushed market interest rates on the bonds sharply higher, making it more expensive for the countries to borrow and devaluing previously issued bonds.

Debt-ridden Greece, all but closed out of the bond market as rates on its bonds have soared into double digits, a week ago was forced to request more than $140 billion in loans from the rest of Europe over the next three years. Investors have worried that Portugal and Spain might follow.

For weeks, many analysts have been expecting the ECB to step into the deteriorating bond market as a buyer of last resort (dubbed the "nuclear option" by some economists). But the purchase commitment announced Sunday was a move that the central bank -- which prizes its independence -- had been reluctant to make.

As recently as Thursday, ECB policymakers held a regularly scheduled meeting and President Jean-Claude Trichet said afterward that the idea of using ECB funds to buy euro-zone government bonds wasn't even discussed.

That wasn't what sinking financial markets wanted to hear: The ECB's reticence was one of the triggers for the global stock market sell-off Thursday that spread to the U.S. and led to one of the wildest trading sessions in Wall Street history -- including a computer-driven plunge of more than 700 points in the Dow Jones industrial average in the space of a few minutes.

By Friday, the ECB may have realized it had little choice but to bring its firepower to bear in Europe's bond markets. The eroding value of government bonds put banks in Europe and worldwide at risk because financial institutions hold huge amounts of that debt. Late last week interest rates were rising on short-term loans between European banks, suggesting that some banks were becoming leery of lending to others -- similar to what followed the failure of brokerage Lehman Bros. in September 2008.

Lehman's demise, of course, led to a virtual freeze-up of credit markets worldwide, plunging the global economy into a deep recession.

With its decision Sunday, the ECB is taking a page out of the Federal Reserve's book: The Fed last year committed to buying a total of more than $1 trillion worth of mortgage-backed bonds and U.S. Treasury bonds in an attempt to keep long-term interest rates subdued. By providing consistent demand for the debt the Fed sought to help to limit any upward pressure on bond interest rates that might have occurred if few private investors were willing to step up and make purchases.

Critics, however, say central banks are simply printing more money to paper over a crisis rooted in excessive consumer, business and financial-system debts piled up over the last decade.

The ECB, wary of being accused of stoking inflation, said any bond purchases would not lead to more money sloshing around the European economy because the bank would effectively "sterilize" its purchases by reabsorbing the liquidity in other ways.

The European bank also got help Sunday from the Federal Reserve and other major central banks, which pledged to reopen so-called currency swap lines among themselves -- with the goal of making sure that European commercial banks that need dollars to fund themselves can get their hands on those greenbacks.

The swap lines had been one of the critical lending facilities central banks introduced during the 2008 credit crisis to unfreeze the banking system.

-- Tom Petruno

Photo: The European Central Bank's logo. Credit: Hannelore Foerster / Bloomberg News

 

Stock sell-off slows after Tuesday's rout; euro hits new one-year low

European stock markets ended broadly lower Wednesday for a second day, but the losses were significantly smaller than in Tuesday’s rout.

The euro also continued to sink, but at a slower pace. The euro was trading at a new 12-month low of $1.286 in New York at around 11:05 a.m. PDT, down from $1.30 on Tuesday and $1.32 on Monday.

Wall Street also has been trying to stabilize. The Dow Jones industrial average was off 53 points, or 0.5%,  to 10,873 at about 11:05 a.m. PDT, after diving 225 points on Tuesday.

Stock market selling eased even though fear that Portugal and Spain could be frozen out of credit markets -- and forced to turn to the rest of Europe for bailouts, as Greece did -- failed to recede, at least as measured by market yields on Portuguese and Spanish bonds.

Moody’s Investors Service warned that it might cut Portugal’s bond rating because of the “recent deterioration” in the country’s finances and the risk that Portugal could face higher borrowing costs “for some time to come.”

The yield on two-year Portuguese government bonds jumped to 5.51% from 4.55% on Tuesday and 3.66% on Monday. Spain’s two-year government bond yield rose to 2.61% from 2.19% on Tuesday and 1.97% on Monday.

Axel Weber, a key council member of the European Central Bank, tried to rally German lawmakers to approve Germany’s share of the Greek bailout, warning that “there is a threat of grave contagion effects for other member states in the monetary union” from the crisis.

Still, stock investors’ rush for the exits slowed. The Spanish market slumped 2.3%, less than half the 5.4% loss on Tuesday. Portuguese stocks dropped 1.4% after losing 3.8% on Tuesday. The German market was off 0.8% after sliding 2.6% the day before.

In Greece, where riots raged against the austerity measures that would be forced on the country as part of its $146-billion bailout from the rest of Europe and the International Monetary Fund, the stock market fell 3.9% after plummeting 6.7% on Tuesday.

Greece’s market now has lost 43% of its value since mid-October, although the main market index, at 1,662 on Wednesday, still was above its decade low of 1,469 reached in March 2009.

-- Tom Petruno

Photo: An Athens crowd on Wednesday protesting Greece's austerity plans. Credit: Dimitar Dilkoff / AFP/ Getty Images

Debt fears again ravage Europe's markets -- and drag Wall Street down

After a one-day respite, European markets have crumbled again on Tuesday on fears that the European Union's $146-billion bailout plan for Greece won't be enough to stem a broader government debt crisis on the continent.

"Markets have given a clear 'thumbs down' to the Greek aid package," said Win Thin, a currency strategist at Brown Bros. Harriman & Co. in New York.

Europe's mess, and fresh worries about an economic slowdown in China, have sent Wall Street reeling as well, with the Dow Jones industrials down about 221 points, or 2%, to 10,930 at about 9:10 a.m. PDT.

The market yield on two-year Greek government bonds soared above 14% after falling to 10.28% on Monday. Worse, yields also resurged on Portuguese and Spanish government bonds, signaling investors' doubts about those countries' ability to handle their debts without help from the rest of Europe.

The euro currency has plummeted to a new one-year low of $1.303 from $1.321 on Monday.

Spanish Prime Minister Jose Luis Rodriguez Zapatero said speculation about a bailout for Spain was “complete madness” but that didn't do much to change the mood. Spanish stocks dived 5.4%, leading a broad-based retreat in battered European equity markets.

For Greece, "The markets are telling us that the aid package has not lessened default risk by any significant amount," Thin said.

-- Tom Petruno