Meanwhile, the bankruptcy of the brokerage firm MF Global sent some ripples through the markets, reducing trading volumes as its traders were barred from commodity exchange floors in Chicago and New York, but analysts and traders said its effects were minor compared with the actions in Greece.
Declines that started in Asia accelerated in Europe — where the major indexes slumped 5 percent. Bank stocks led the sell-offs, and the broad United States stock market slid nearly 3 percent. In the credit markets, crucial stress gauges moved toward recent highs, while rising interest rates on Italian debt underscored investors’ growing doubts about that highly indebted country, which has become the new focus of concern in the euro zone.
“It is all Europe right now,” said Eric Green, an economist at TD Securities in New York.
The Greek referendum threatened to undo the work of the summit meeting last week in Brussels, where leaders outlined a rescue plan that cheered markets and contributed to the biggest monthly United States stock market rally in October since 1982.
“The markets don’t know which way to look,” said Andrew Wilkinson, an economist at Miller Tabak Company.
“This has absolutely blindsided markets.”
The declines in Europe wiped out the exuberant gains of last week after the Brussels deal, which initially led some investors to believe Europe was addressing the Greek problem. The reversal in Greek markets included insurance contracts on bonds pricing in a higher likelihood of default.
Even last week doubts grew that the grand European plan would be enough to stop the crisis from spreading to Italy, a much bigger economy that has to refinance billions of euros of debt in the coming year.
Italy has a small budget deficit of about 3 percent of its gross domestic product, which means it has a relatively small amount of net new borrowing to do, although this percentage may be revised upward if growth slows next year as expected.
The much bigger problem is its mountain of existing debt that must be rolled over as it matures — about 52 billion euros this year and 307 billion more next year, according to Tobias Blattner, an economist at Daiwa Securities in London.
As Italy’s borrowing costs shoot up — the 10-year government bond yield jumped to a record 6.33 percent on Tuesday — investors are concerned that too much of its strained budget will be consumed by the costs of its enormous debt.
In signs of a reappearance of stress in the European credit markets, the rates that banks charge to lend euros to one another rose, and the costs to banks of swapping euros for dollars in the open foreign exchange market — the three-month euro-dollar cross-currency basis swap — also increased sharply.
The cost of insuring the debt of a basket of European banks against default rose to the highest level since Oct. 5. It now costs $261,000 to insure $10 million of bank debt annually for five years, compared with $207,000 at the end of last week, according to the data provider Markit.
Analysts said European leaders had so far failed to come up with a clear solution to cope with a problem on the scale of Italy’s debt.
Officials had proposed maximizing the European bailout fund, though they did not offer details, and in particular had not defined a role for the European Central Bank, analysts said.
The central bank was buying bonds to support the Italian bond market on a large scale on Tuesday, traders said. But many analysts say it is inevitable that the central bank will have to act much more aggressively, in effect printing money by buying hundreds of billions of euros of bonds from peripheral countries like Italy.
Such an action, however, is politically poisonous in countries like Germany where the public fears inflation. It would be a big test for Mario Draghi, the new president of the European Central Bank, whose first day in office was Tuesday.
Article source: http://www.nytimes.com/2011/11/02/business/daily-stock-market-activity.html?partner=rss&emc=rss
