World financial markets tumble on fears of debt crisis in Europe
Global financial markets tumbled Tuesday as investor sentiment caved to the worsening government-debt crisis in Europe.
The Capitol Hill grilling of Goldman Sachs Group Inc. executives on their role in the housing-market meltdown also undercut Wall Street, traders said. Financial shares led the market lower, although Goldman’s stock rebounded.
U.S. stocks, which Friday had hit 19-month highs, suffered their biggest sell-off since early February. The Dow Jones industrial average slumped 213.04 points, or 1.9%, to 10,991.99, falling below 11,000 for the first time in two weeks.
Some investors ran to the classic havens of Treasury bonds and gold.
Wall Street’s slide followed heavy selling in European stock markets — and a dive in the euro currency’s value — after Standard & Poor’s slashed Greece’s credit rating to junk status and cut Portugal’s by two notches.
The Greek government, struggling under a massive debt load, on Friday formally requested a $60-billion bailout from the rest of Europe and the International Monetary Fund.
Even with a bailout ostensibly on the way, Standard & Poor’s said it downgraded Greece’s debt because of longer-term concerns about the country’s finances. In particular, S&P questioned Athens’ “political resolve to embrace a fiscal austerity program of many years’ duration.”
The rating firm cut Greece’s bond rating to BB-plus from BBB-plus, apparently marking the first time that a country in the euro zone has dropped to junk status, or what is considered below “investment grade.” However, S&P’s main rivals, Fitch Ratings and Moody’s Investors Service, still rate Greece investment grade.
The Portuguese government, also burdened by heavy debt, was cut to A-minus from A-plus by S&P. Portugal, which so far hasn’t requested help from the rest of Europe, “could struggle to stabilize its relatively high debt ratio” until 2013, S&P said.
Buoyed by reports pointing to continuing economic recoveries in the U.S. and Asia, most world markets had held up relatively well in recent weeks despite Greece’s worsening fiscal mess.
But Greece’s slide into junk territory, and S&P’s warnings about Portugal, renewed fears that Europe could be facing a debt “contagion” that would open a new chapter in the global financial crisis.
“This shows the problems aren’t over,” said Tom Tucci, head of government bond trading at RBC Capital Markets in New York.
S&P’s moves triggered another blistering sell-off in the bonds of Europe’s weakest economies, including Greece, Portugal and Ireland. The yield on two-year Greek bonds rocketed to 15.35% from 13.16% on Monday and 6.1% two weeks ago. Traders said that was a sure sign that the market believes Greece ultimately would seek to restructure its debt by cutting interest or principal payments, or both, even if it gets a short-term bailout.
Scott Mather, who manages global bond mutual funds at money management giant Pimco in Newport Beach, said his firm wouldn’t buy Greek bonds even at their current double-digit yields. “It’s looking like some kind of debt restructuring will have to occur,” he said.
S&P warned that if Greece restructured its debt, current bond owners might recover just 30% to 50% of their principal amount.
Mather said Tuesday’s dive in markets could force European policymakers to act quickly on financial help for Greece. “They’re going to try to ring-fence this one way or another,” he said.
In the meantime, some investors ran to the relative safety of U.S. Treasury bonds. The yield on the 10-year T-note fell to 3.69% from 3.81% on Monday. Investors also bought $44 billion of new two-year notes from the Treasury at a yield of 1.02%.
Gold also benefited, with near-term futures rising $8.20 to $1,161.70 an ounce.
For the U.S. stock market, Europe’s woes provided a good excuse for some investors to take profits after the powerful rally since early February, said Jeffrey Saut, chief investment strategist at brokerage Raymond James & Associates.
“We have been overdue for a ‘correction,’ ” Saut said. He thinks the market could fall between 5% and 10% from Friday’s 19-month highs, but he expects the U.S. economy to stay on a recovery path, underpinning share prices.
The Standard & Poor’s 500 index, which had climbed 15% from Feb. 9 through Friday, lost 28.34 points, or 2.3%, to 1,183.71 on Tuesday. The Nasdaq composite index dropped 51.48 points, or 2%, to 2,471.47.
Financial stocks were the day’s biggest losers within the S&P 500 index, falling 3.4% on average. Some traders said the Senate hearings on Goldman Sachs focused investors on Democrats’ push to overhaul financial-system regulation and rein in banking firms. The overhaul legislation remains stalled in the Senate.
Europe’s debt woes also weighed on banks in general. European banks could face a new financial hit because of the slumping value of government bonds they hold.
Goldman’s shares, which had fallen 3.4% on Monday, bucked the trend Tuesday, rising $1.01 to $153.04.
