- The Washington Times - Wednesday, May 5, 2010

Global stock markets plummeted Tuesday on doubts that the European Union’s $145 billion bailout package for Greece will keep the European debt crisis from spreading weakness around the world.

Spain became the latest target of speculators, who drove down that country’s main stock index by more than 5 percent, forcing Spanish officials and the International Monetary Fund (IMF) to deny rumors that the debt-burdened country had requested a loan package that could be far more expensive than Greece’s.

The Dow Jones Industrial Average plunged as much as 283 points to below 11,000 as investors focused on the growing possibility of a fall back into recession in Europe that could hurt prospects for the U.S. and global economies.

RELATED STORY: 3 die in bank fire during Athens riots

Adding to the market gloom was evidence of cooling in China’s economy, which has been a principal engine for world growth in the past year, as well as a barrage of disconcerting recent developments from the massive oil spill in the Gulf of Mexico to an attempted terrorist attack in New York.

Bourses fell from Madrid to Moscow, prices for oil and other commodities plunged, and investors punished the euro, sending the currency to its lowest level in a year against the dollar, while piling into safe havens such as U.S. Treasury bonds.

“The collapse of the euro, the oil gusher in the Gulf, along with the hangover of ‘Times Square terrorist’ concerns all sent the equity markets and commodities around the world into a risk-asset dump,” said John “Rocket” Spinello, chief strategist at Jefferies & Co.

“The Greek bailout has now turned into a contagion event” that is forcing up European interest rates and driving down stocks everywhere, he said. “Will the turmoil in Europe create damage in Asia and slow down in a major way the recovery taking place in the U.S.? The one-day verdict in equities is: Perhaps.”

“The debt crisis seen in Greece has odds to multiply and stretch to peripheral countries like Spain and Portugal,” which also face burgeoning debts amid deep economic downturns, said Jamie Heighway, an analyst at Custom House, a Canadian foreign exchange firm.

“The quick trigger fingers of traders in circumstances such as this one only add to evidence that plenty of uncertainty persists throughout the global marketplace” about whether the tentative recoveries seen in the U.S., Europe and other major economies will continue, he said.

David Forrester, an analyst with Barclays Capital, said markets were “underwhelmed” by the emergency loan package for Greece announced over the weekend.

Investors are concerned that EU support for the Greek bailout still must clear parliamentary hurdles in European capitals and that Germany’s insistence on attaching severe budget austerity requirements to the money to overcome opposition among German voters will make it more difficult to Greece and the rest of Europe to maintain growth and rein in their debts, he said.

Greeks protesting proposed cuts in civil service pay and pensions stormed the Acropolis in Athens and unfurled banners saying, “Peoples of Europe Rise Up,” raising questions whether Greece will be able to even carry out the draconian measures promised by the government without sparking severe social unrest.

Joseph Stiglitz, an American Nobel Prize winner and Clinton White House economic adviser, warned of a self-feeding downward economic spiral as governments impose big budget cuts and tax increases to try to curb their borrowing, only to plunge their economies further into recession.

“If you cut budgets too excessively, the economy gets weaker, tax revenues go down and the improvement in the fiscal position of the country is much less than one would have hoped,” he told BBC radio.

“This is specially true because other countries in Europe will be going through similar exercises and the result of that is that the recovery of Europe, which is based on concerted government expansionary policy, will also be weaker.”

Given the great difficulty the European Union had in coming up with the rescue package for Greece, which is one of the smallest European economies, traders worry that the task for assisting a larger country such as Spain or Ireland, if necessary, could prove impossible, both for the EU and the IMF.

“The market no longer has confidence” in the eurozone’s capacity to deliver, said Pablo Guijarro, an analyst at AFI financial consultancy. “It’s increasingly difficult to believe that a short-term and joint solution is possible” after the Greek debacle.

Concern about the spreading threat to the global economy hit Wall Street, overwhelming recent optimism spawned by a string of reports showing improvement in the U.S. economy. The Dow ended down 225 points, or 2 percent, at 10,937 while the Standard & Poor’s 500 Index and Nasdaq Composite Index lost 2.4 percent and 3 percent, respectively.

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