Despite much fanfare at a summit last week, European leaders failed to convince global investors that they are on their way to solving their massive problems with debt and recession.
Global markets swooned Monday, with the Dow Jones industrial average losing as much as 234 points and European stock indexes plummeting by up to 4 percent, after two more Wall Street credit agencies warned that the summit's debt reduction accord does not go far enough and worsening economic and financial conditions continue to threaten the health and existence of the eurozone.
Moody's Investors Service noted the "absence of decisive policy measures" at the summit to ease severe financial stress, and said it will consider downgrading many European countries early next year.
"The longer the incremental approach to policy persists, the greater the likelihood of more severe scenarios, including those involving multiple defaults by euro area countries and those additionally involving exits from the euro area," said Alastair Wilson, managing director at Moody's.
Fitch Ratings also panned the outcome of the summit, saying it did little to prevent "a significant economic downturn" that will last for all of next year and probably beyond.
Standard & Poor's Corp., the first Wall Street agency to put the eurozone on notice this month, was silent Monday.
But it earlier warned that it likely would downgrade even AAA-rated Germany and France if the summit failed to take significant steps to resolve the crisis.
The spate of credit warnings reawakened worries in financial markets around the world.
Stock markets in Europe plummeted, losing 3 percent to 4 percent of their value, and the interest rates on securities offered by Italy and other debt-strapped countries remained perilously high.
In the U.S., stocks fell as much as 2 percent, but then steadied amid hopes for stronger growth in the U.S.
Treasury bonds continued to benefit from investors seeking safe havens from the storm in Europe, despite the Treasury's own huge debt financing needs, with the yield on the Treasury's 10-year bond falling to just a sliver above 2 percent.
"Once again, Europe's leaders did not brandish the big bazooka that the markets are crying out for," said Thomas Kleine-Brockhoff, director of the German Marshall Fund's EuroFuture Project.
"Instead, Europe is doggedly pursuing its step-by-step approach as introduced several summits ago.
Given the continuing disconnect between markets and politicians," he said, European leaders will have to "scramble" again within a few weeks or months "for what to do next to prevent a market meltdown."
In a pattern repeated often in the past two years, markets initially applauded the summit accord, but then "realized that the latest comprehensive plan wasn't all that comprehensive; that there are not enough short-term crisis resolution measures ... and that long-term fixes are impressive, but incomplete," Mr. Kleine-Brockhoff said.
Ward McCarthy, managing director at Jefferies & Co., said that despite being "exhausted" by the long-running soap opera in Europe, investors can't stop watching because so much is at stake.
"It's like a bad marriage, now too costly to break up," he said. "Investors are exhausted, frustrated, and overwhelmed by the events. ... With its political, social-economic and financial complexities, Europe appears to be too difficult to understand, too big to bail out and too risky to lend to."
Investors have been reacting to every headline that crosses the screen without much deep analysis, he said.
"You either believe that Europe gets fixed or you don't; there's little chance that the market will be appeased by a compromise solution."
Investors are bracing for a default by Greece or other countries, which would become the "ground zero" of a nuclear bomb hitting the banking system and global economy, he said.
While the summit accord failed to calm most market fears, it wasn't completely "a damp squib," said Howard Archer, chief European economist at IHS Global Insight.
In particular, the accord added a great deal of "firepower" to the International Monetary Fund and the European stability funds established to bail out failing governments, he said.
Healthy European countries are contributing another $270 billion to the IMF to be available to help stressed European countries, and are making nearly $1 trillion available through the European funds, although some of that already has been committed to helping Greece, Ireland and Portugal.
But the resources available are still too limited to contain the crisis should Spain and Italy "run into serious problems," Mr. Archer said, estimating that the borrowing needs of those two large countries will amount to $795 billion in the next year or so.
The pact also contains nothing to address the big trade imbalances within the eurozone that contributed to the crisis, he said, and it contains nothing to prevent the kinds of housing and credit bubbles that brought down Spain and Ireland.
"This is far from a complete solution to the eurozone sovereign debt crisis, and market pressure is likely to remain high for further action," he said.
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