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Stocks fall as European optimism fades

December 12, 2011 | 10:00 am

One day.

That seems to be how long the optimism about Europe's new plan to deal with its financial crisis lasted.

The deal was marketed as a solution to Europe's lingering debt crisis, and after it was announced on Friday stocks rose.

But when markets opened again Monday morning, investors seemed to have thought better of their initial optimism, driving stocks prices down and yields on European bond prices up, indicating that there is still fear about lending money to some of Europe's most troubled economies.

The Dow Jones industrial average was recently down 224.02 points or 1.8%  to 11959.33. European markets closed down even more sharply, with leading indexes down 3.4% in Germany and 2.6% in France.

The big blow to confidence Monday morning was a report from Moody's credit rating agency stating that Friday's agreement did little to help the credit situation of European economies -- and that Moody's may still downgrade the credit ratings of European countries.

"The communique offers few new measures, and does not change our view that risks to the cohesion of the euro area continue to rise," the Moody's report says, referring to Friday's agreement.

Meanwhile, in Israel, Standard & Poor's chief economist expressed his own reservations about the European deal.

Friday's agreement, announced by German Chancellor Angela Merkel and others, strengthened emergency crisis funds and created new measures to ensure the fiscal discipline of European Union members. But critics questioned if the measures would be put into effect quickly enough, and if there are sufficient avenues for enforcement.

The agreement was supposed to give investors faith that Spain, Italy and other European nations would be able to pay back lenders, despite their big national debts and deficits. On Monday, though, investors fled from these bonds, driving the yield on the 10-year Italian bond up to 6.54%, from 6.33% on Friday.

"The fiscal and economic prospects of Italy and the other southern Eurozone countries remain very precarious," John Higgins, an economist with Capital Economics, wrote in a note to clients Monday. "Indeed, we think that Italy will have to go through years of severe pain if it is to reduce its public debt to a sustainable level and thrive within the region even if it is provided with years of major financial assistance."


No quick solution to Europe's debt crisis

Europe debt crisis plan hinges on economic growth

Europe crisis makes pecking order clear: 'Merkozy,' then the rest

-- Nathaniel Popper

Photo: German Chancellor Angela Merkel. Credit: Michael Sohn / Associated Press