August 9, 2022

Stocks & Bonds: Markets Falter as Worry Rises in Greek Crisis

Thousands took to the streets in Athens to protest austerity measures, and Prime Minister George Papandreou said he would reshuffle his cabinet and request a vote of confidence in Parliament. At stake is the prospect of a new bailout plan for the debt-ridden country.

Anxious investors feared the situation could spin out of control, igniting a series of crises in other heavily indebted euro zone countries, like Portugal, Ireland and Spain. That, in turn, could threaten Europe’s banks and even reach into the United States financial system.

“We are pretty much giving back everything we got yesterday and more,” said Lawrence R. Creatura, a portfolio manager at Federated Investors, noting the rise in the main American indexes of more than 1 percent Tuesday. “Today the market just can’t escape the undertow of deteriorating economic data and political events.”

After having lost more than 200 points earlier Wednesday, the Dow Jones industrial average closed down 178.84 points, or 1.5 percent, to 11,897.27. The markets rallied earlier this year on confidence about the economic recovery, and at one point the Dow was poised to break through the 13,000 mark. But stocks have been falling week after week on a drumbeat of dismal economic news from soft job creation to falling housing prices.

The market has surrendered almost all of its gains for this year, falling 7 percent since its peak at the end of April. It may be nearing what is known as a market correction, a sort of miniature bear market characterized by a 10 percent decline in a short period of time.

Greece needs to pass a new round of austerity measures by the end of the month in return for new loans from the International Monetary Fund and the European Union.

In Athens, thousands joined a nationwide strike as Parliament prepared to debate a second round of sharp cuts in government spending. The measures are unpopular with Greeks, who have already suffered deep salary and pension cuts.

Although many analysts expect that a default by Greece on its debts will eventually be averted, the political uncertainty in Greece is providing an unsettling backdrop for investors. In addition, they are fretting because the United States this summer faces its own fractious negotiations over raising the federal debt ceiling.

The European Central Bank said on Wednesday in a report on financial risk that it would be a big mistake for Greece to be allowed to miss its debt payments, either by delaying payments to a later date, or by paying back less than the full amount. Germany, the biggest economy in the 17-member euro zone, is proposing that private sector bondholders accept some form of a loss on their Greek bonds.

This could prove damaging to Greek banks, requiring them to mark down the value of their holdings of government debt at a time when they are struggling with bad loans in their home market. And it could have similar dire repercussions for other European banks that hold Greek debt.

“The concern is that a default by Greece would not only hurt European banks but could also spread to U.S. banks,” said Bernard Baumohl, an economist at the Economic Outlook Group in Princeton, N.J. “Should there be a default, it can only have a delaying effect on the recovery, hurting American exports and the banks’ ability to lend.”

Pointing to a slowing United States economy, a Federal Reserve regional report for New York State showed a decline in both manufacturing activity and optimism for June. Also Wednesday, a government report showed consumer prices crept up again, though they were held in check by a decline in energy prices.

The recent economic data has prompted economists to steadily downgrade their forecasts for economic growth in the second quarter of this year. Macroeconomic Advisors, a prominent forecasting firm, on Wednesday lowered its annualized second-quarter gross domestic product forecast to 1.9 percent, compared with the 3.5 percent growth it was expecting when the quarter began.

Contributing reporting were Christine Hauser, Rachel Donadio, Niki Kitsantonis, Matthew Saltmarsh and Jack Ewing.

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