U.S. stocks dropped sharply Monday and global markets plummeted even more as the crisis between Greece and its Eurozone creditors edged toward a financial cliff for the nation.
Major U.S. indexes lost more than 2% and European markets fell more than 3% as investors shifted into safer assets, mainly U.S. and German bonds, until the Greek debt drama resolves itself with a default, a deal or an extension.
Without an extension, the Greek government is expected to default on a $1.8-billion payment Tuesday on its bailout from European creditors and the International Monetary Fund.
U.S. officials warily watched the crisis unfold, but analysts said the risk that Greece's problems would spread to other weak economies on Europe's southern periphery was probably contained and that even a Greek default and exit from the Eurozone posed little threat to the U.S. recovery.
FOR THE RECORD:
An earlier version of this article said the Down Jones and S&P 500 indexes were up for the year. In fact, both are down year to date.
"For us as a country, it's relatively minor," said Alan Whitman, an analyst with Morgan Stanley. "We don't see the Greek situation as being overly detrimental" to the broader markets.
Still, the uncertainly took a toll. Both the blue-chip Dow Jones industrial average and the broader Standard & Poor's 500 index suffered their biggest one-day percentage drops of the year.
The Dow fell 350.33, or 1.9%, to 17,596.35, and the S&P sank 43.85, or 2.1%, to 2,057.64. Both gave back most of the gains made this spring on signs of a strengthening U.S. job market and other economic improvement. Both indexes are down for the year.
At the same time, investors snapped up U.S. government debt, pushing down the already low yield on the 10-year Treasury note by about a sixth of a percentage point to 2.33%, an amount consistent with what analysts said was a calibrated retreat to safety, not a panic.
Treasury Secretary Jacob J. Lew and senior department officials are closely monitoring the situation with Greece. On Sunday, Lew told Greek Prime Minister Alexis Tsipras that it was in the best interests of Greece, Europe and the global economy to resolve the debt problems.
A balanced compromise needs to be forged that will keep Greece in the Eurozone and put it on a path to recovery, senior Treasury officials said. The Greeks must agree to continue economic reforms while its lenders need to provide some debt relief, the officials said.
The U.S. economy has strengthened over the last few years and has limited direct exposure to Greece. But, the senior Treasury officials said, Greece's problems could spill into the European economy, and that would create problems for the U.S.
Tsipras decided to hold a voter referendum on whether to accept additional government spending cuts in exchange for a new bailout deal. He set the vote for Sunday — five days after the deadline for averting default.
On Monday, meanwhile, S&P Ratings Services downgraded Greece's long-term rating to CCC-minus from CCC, saying the country was likely to default on its commercial debt in the next six months. The ratings company also said there was a 50% chance Greece would exit the Eurozone.
S&P, like many Wall Street institutions and analysts, lined up with European creditors in affixing blame for the current impasse on the struggling Greek government.
"In our view, the Greek government's decision to hold a national referendum on official creditors' loan proposals indicates that Prime Minister Alexis Tsipras will prioritize domestic politics over the country's financial and economic stability, commercial debt service and membership of the Eurozone," S&P said.
Though stock markets were jittery, the much-larger bond market offered signs that any contagion throughout Europe had yet to take hold.
Analysts' biggest fear is that other Eurozone countries struggling with relatively high debt loads and slow growth — especially Italy, Spain, and Portugal — would see their own borrowing costs jump as investors fled for the relative safety of U.S. or German debt.
Analysts are worried about the possibility of a downward spiral of higher debt costs leading to slower growth.
Investors hammered the Greek debt Monday, the first trading day after the call for a referendum. The yield, or interest rate, on its 10-year bond rose more than four full percentage points to 14.68%.
Meanwhile, the yield on the German 10-year bond, a haven for European investors, dropped about a tenth of percentage point, to 0.8%. That makes the spread, the difference between the two nation's bonds, more than 13 percentage points, a reflection of the extreme nature of the Greek crisis.
Analysts cited the relative resilience of Italy's and Spain's government debts as evidence that contagion beyond Greece is being contained, at least for the moment.
The 10-year treasury notes for both countries rose more than 10% Monday, but the actual jumps were modest: 0.22 point to 2.38% for Italy's debt and 0.21 point to 2.32% for Spain's debt. About three years ago, when the Greek debt crisis shook world markets, both Italy's and Spain's debt rates peaked at more than 6.5%.
"The fallout for the rest of Europe and the global economy will be small," said Mark Zandi, chief economist for Moody's Analytics. "Financial markets are being roiled by the unseemly turn of events, but this will be short-lived as it becomes clear there will be little impact outside of Greece."
Times staff writer Jim Puzzanghera in Washington, D.C., contributed to this report.