Stocks swoon amid Greek cri­sis

Ma­jor U. S. in­dexes fall about 2% as the Eu­ro­zone debt stand­off con­tin­ues.

Los Angeles Times - - BUSINESS - By Dean Stark­man

NEW YORK — 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 about 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 $ 1.8bil­lion 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 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 un­cer­tainty took a toll. 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 points, or 1.9%, to 17,596.35, and the S& P sank 43.85 points, 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 off icials 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 longterm 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 fi- nan­cial 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 con­ta­gion through­out Europe had yet to take hold.

An­a­lysts’ big­gest fear is that other Eu­ro­zone coun­tries strug­gling with rela- tively high debt loads and slow growth — es­pe­cially Italy, Spain, and Por­tu­gal — would see their own bor­row­ing costs jump as in­vestors f led 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 per­cent­age points to 14.68%.

Mean­while, the yield on the Ger­man 10- year bond, a haven for Euro­pean in­vestors, dropped about a tenth of a per­cent­age point, to 0.8%. That makes the spread, the dif­fer­ence be­tween the two na­tion’s bonds, more than 13 per­cent­age points, a ref lec­tion 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 now.

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. As the Greek debt cri­sis has shaken world mar­kets pe­ri­od­i­cally over the last six years, 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 short­lived as it be­comes clear there will be lit­tle im­pact out­side of Greece.”

Mi­los Bi­can­ski Getty I mages

WITH­OUT AN EX­TEN­SION, the Greek gov­ern­ment is ex­pected to de­fault on a $ 1.8- bil­lion pay­ment Tues­day. Above, Greeks wait to with­draw cash Mon­day. The yield on Greek debt rose to 14.68% on Mon­day.

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