European debt woes send global markets diving
Global investors’ fears about a potential full-blown government debt crisis in Europe fueled a massive rush for safety on Thursday, driving stocks, commodities and other assets sharply lower.
European stock markets ended the day off at least 2%, and some fared far worse: The Spanish stock market plummeted nearly 6%, Portugal's market dived 5% and Italy’s sank 3.5%.
On Wall Street, the Dow Jones industrial average was down 213 points, or 2.1%, to 10,057 at about 10:25 a.m. PST, hurt by Europe’s plunge and by a surprising rise in new claims for unemployment benefits. The claims data are spooking market bulls ahead of Friday’s government report on January employment.
Many investors and traders also are fleeing commodities for the perceived safety of the dollar and U.S. Treasury bonds. Gold was down $47, or 4.2%, to $1,065 an ounce in New York.
The mess in Europe began in Greece in late November, as the country’s mounting budget deficit -- a result of surging government spending to shore up the economy -- spooked investors. They demanded ever-rising yields on Greek bonds to compensate for what they viewed as rising risk.
As with the subprime mortgage crisis in the U.S. two years ago, Greece’s woes have proved contagious -- in this case, for some other European governments running large deficits.
Portugal could be the next domino to fall. The yield on five-year Portuguese government bonds rose to 3.95% on Thursday, up from 3.32% just two weeks ago. Government bond yields also have risen sharply in Spain, Ireland and Italy.
“No longer are investors sitting ready with blank checks to underwrite any amount of debt that governments wish to issue,” said Tony Crescenzi, a bond strategist at Pimco in Newport Beach.
European Central Bank President Jean-Claude Trichet tried to foster confidence on Thursday, saying he believed that Greece would make good on its promise to slash its deficit via higher taxes, a freeze on public-worker salaries and other measures.
But if austerity moves are forced on more European governments, the risk is that the continent could tilt back into recession -- which could further hammer European stock markets and commodity prices.
In an echo of the market calamity of the last few months of 2008, the dollar and U.S. Treasury securities are gaining as investors run away from risk elsewhere.
The euro sank to $1.376 Thursday, down from $1.389 on Wednesday and the lowest since May. The euro was at $1.51 as recently as late November.
The yield on two-year Treasury notes slid to 0.80% from 0.88% on Wednesday. The U.S. has its own giant budget deficit, of course, but for most investors the question of whether to trust Greek bonds or Treasuries is easily answered.
-- Tom Petruno
Photo: The European Central Bank's logo. Credit: Hannelore Foerster / Bloomberg News