Stocks, Euro Tumble as Credit Risk Surges on Greece Debt Concern

U.S. Stock Futures Fall
Traders work at the New York Stock Exchange on Sept. 9, 2011. Photographer: Scott Eells/Bloomberg

Stocks sank, while the euro touched a ten-year low versus the yen and a six-month low against the dollar, as concern grew about Greece’s debt crisis. European bank and sovereign credit risk reached all-time highs as 10-year Treasury yields slid to a record. Oil fell 2 percent.

The MSCI All-Country World Index retreated 2.9 percent and the Standard & Poor’s 500 Index slipped 2.7 percent to 1,154.23 at the 4 p.m. close in New York, wiping out a weekly gain. The euro sank as much as 2.1 percent to 105.3 yen and fell 1.8 percent to $1.3627 before trimming losses. Ten-year Treasury yields slid as low as 1.89 percent. Credit-default swaps signaled a more than 90 percent probability Greece will default.

Stocks extended losses as three German officials said Chancellor Angela Merkel’s government is preparing plans to shore up banks in the event that Greece defaults. The European Central Bank said Juergen Stark resigned from the executive board, suggesting policy makers are divided over how to fight the debt crisis. U.S. President Barack Obama called on Congress last night to pass a $447 billion plan to boost employment after jobs growth stalled last month.

“There’s that nagging thought that we can continue to have a downward spiral in Europe,” James Dunigan, chief investment officer in Philadelphia for PNC Wealth Management, said in a telephone interview. The firm oversees $109 billion. “There’s concern of a default, of risk in banks, of a liquidity crisis. In the U.S., even as President Obama made an effort to put that plan together, there’s not a whole lot of confidence that Congress will pass.”

Week’s Performance

The S&P 500 lost 1.7 percent since Sept. 2 to cap a sixth weekly drop in the past seven and closed at the lowest level since Aug. 22. The gauge is down more than 15 percent from an almost three-year high at the end of April, while still up 3.1 percent from its low for the year last month.

Financial, technology and energy companies were the biggest drags on the index as all 10 main industry groups dropped at least 1.2 percent. JPMorgan Chase & Co. lost 4.3 percent and Wells Fargo & Co. slid 3.6 percent, while Alcoa Inc. and Exxon Mobil Corp. lost at least 2.5 percent. McDonald’s Corp. sank 4 percent after August sales trailed estimates.

Hewlett-Packard Co. and American Express Co. dropped at least 4.5 percent to lead declines in all 30 stocks in the Dow Jones Industrial Average, which fell 303.68 points, or 2.7 percent, to 10,992.13.

Obama Plan

Concern about Europe’s debt crisis overshadowed President Obama’s $447 billion jobs plan that economists at Goldman Sachs Group Inc., Moody’s Analytics Inc. and JPMorgan Chase & Co. say would boost U.S. gross domestic product by as much as 2 percent in 2012. Pacific Investment Management Co.’s Mohamed El-Erian said President Barack Obama is moving for the first time to “get ahead” of U.S. economic challenges because the Federal Reserve is unable to revive employment on its own.

"My hope is that there’s enough there for both parties so that they can coalesce to the center," El-Erian, chief executive and co-chief investment officer of the world’s biggest manager of bond funds, said in an interview on Bloomberg Television’s "In the Loop" with Betty Liu. "The risk is they may not, but this is the first time the administration really recognizes how deep our economic challenges are and tries to get ahead of them. So hopefully this is a building block. But the jury is still out."

The Dollar Index, which tracks the U.S. currency against those of six trading partners, rose 1.2 percent to the highest level since March as the currency strengthened against all 16 major peers.

European Stocks, Euro

The Stoxx Europe 600 Index lost 2.6 percent, extending this week’s retreat to 3.7 percent. Porsche SE tumbled 14 percent after Volkswagen AG said it will no longer complete its merger with the sports-car maker by the end of the year because of pending lawsuits. Verbund AG, Austria’s biggest power company, sank 12 percent after cutting its guidance for 2011.

The euro weakened 3.8 percent against the dollar since Sept. 2, its biggest weekly decline in more than a year. The yield on the two-year German note dropped to as low as 0.377 percent, with the 10-year bund yield sliding as low as 1.77 percent, the lowest on record for both.

Greek Bonds

Greek two-year note yields added as much as 203 basis points to 57.08 percent, a euro-era record. Credit-default swaps insuring Greek sovereign bonds jumped 475 basis points to a record 3,500, according to CMA. One-year Greek note yields jumped 325 basis points to a record 97.96 percent. Spanish and Italian 10-year yields increased 14 and 13 points respectively.

The cost of insuring sovereign debt climbed, with the Markit iTraxx SovX Western Europe Index of credit swaps on 15 governments up 17 basis points at 340. The Markit iTraxx Financial Index of swaps on 25 banks and insurers rose 26 basis points to 290 at 4:30 p.m. in London, according to JPMorgan Chase & Co.

Germany’s emergency plan if Greece defaults involves measures to help banks and insurers that face a possible 50 percent loss on their Greek bonds if the next tranche of Greece’s bailout is withheld, said the people, who spoke on condition of anonymity because the deliberations are being held in private. The successor to the German government’s bank-rescue fund introduced in 2008 might be enrolled to help recapitalize the banks, one of the people said.

‘Only The Beginning’

“It is our belief that a 50 percent writedown is only the beginning,” Dan Greenhaus, chief global strategist at BTIG LLC in New York, wrote in a note to clients. “With Greece’s debt/GDP ratio hitting 160 percent, debt will probably have to be reduced by as much as 75 percent in order to provide a more sustainable starting point.”

Deutsche Bank AG, Germany’s biggest lender, slid 7.3 percent. The benchmark DAX Index lost 4 percent.

Questions over Greece’s ability to meet the terms of its first rescue package are dogging the indebted nation as bondholders weigh whether to participate in a debt exchange that’s crucial to a second bailout. Greece sought responses today from bond investors to the proposed debt swap, part of a 159 billion-euro ($220 billion) European Union rescue plan agreed upon in July.

Greece is committed to “full implementation” of its bailout agreement, the country’s finance ministry said in a statement. The country rejected default talk as “organized speculation,” according to an e-mailed statement from the ministry.

Greece has no plans to publish details of anticipated participation in its debt-swap this week or next, said Petros Christodoulou, head of the country’s debt management office. The response so far has been “very positive,” he said in a telephone interview. “There will not be a number coming out of Athens today or next week. At this moment, more than half of the Europeans have not even responded. It is too early.”

Commodities Retreat

Oil retreated 2 percent to $87.24 a barrel in New York. Copper lost 3.4 percent to $4.0025 a pound in New York. Aluminum, nickel and zinc also declined at least 2 percent. Gold futures gained 0.1 percent to $1,859.50 an ounce, with gains limited as the stronger dollar reducing demand for an alternative asset.

The MSCI Emerging Markets Index fell 2.1 percent, dropping for the first time in three days. OTP Bank Nyrt. led Hungary’s BUX Index 6.2 percent lower after the ruling party proposed letting foreign-currency borrowers repay loans early at a fixed rate with banks covering costs. The Shanghai Composite Index slipped less than 0.1 percent, erasing gains of as much as 1.2 percent, after China’s industrial output growth trailed estimates.

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