Greek debt crisis hammers Dow down 998 points

Greece’s deepening debt crisis triggered a stock panic Thursday, with the Dow Jones Industrial Average plummeting by a record of nearly 1,000 points on fears that the crisis threatens the entire debt-burdened developed world as well as the global economic recovery.

The nearly 10 percent loss in major Wall Street indexes occurred in a breathtaking 15 minutes that made stock market history, but lasted for only seconds and was pared by about half within 20 minutes as buyers moved in to snap up battered stocks in nearly every sector at bargain prices.

The epic proportions of the 998.50-point drop in midafternoon eclipsed even the crash seen after the Sept. 11, 2001, terrorist attacks and the September 2008 collapse of Lehman Brothers.

But the Dow’s quick recovery led to a less-alarming close, down 347.80 points at 10,520.32, which did not even make the list of top 10 market drops, leading to speculation that technical glitches or a trading error may have triggered a wave of computer program selling that exaggerated the sell-off.

At the end of a heart-stopping day, stock indexes from Tokyo to Frankfurt, Germany, had lost up to 4 percent of their value. Just in the past week, global indexes are down 10 percent or more as a result of escalating worries about the Greek debt crisis spreading through Europe and possibly even touching nations like the U.S. and Japan, which also have deeply entrenched debts.

Panicked investors flung themselves into safe havens from U.S. Treasury bonds to gold, with gold prices soaring above $1,200 an ounce. Oil prices and other commodities plunged while the beleaguered euro currency plummeted to a 14-month low of $1.26.

In Washington, political leaders were taken by surprise at the grave reaction in U.S. markets to what had seemed to be remote developments on the other side of the world.

The White House, Treasury and Federal Reserve were said to be “closely monitoring” the situation, while the Securities and Exchange Commission was investigating the possibility of trading errors or glitches.

“The Greek financial crisis is upon us,” said Sung Won Sohn, an economics professor at California State University at Channel Islands, noting that street protests by tens of thousands of Greek citizens turned violent even before Greece’s parliament on Thursday approved deep spending cuts sought by the European Union in exchange for $145 billion in loans.

“We could be seeing the repetition of the Argentine debt default in 1981,” he said. “The domestic pressure against austerity was so intense that Argentina repudiated its foreign debt. The crisis of confidence spread throughout Latin America, leading to the ’lost decade.’ ”

Authorities throughout Europe and Greece repeatedly denied that default was in the cards. But government efforts to keep the Greek crisis from spreading to larger nations, including Spain, and causing a downward economic spiral have failed, said Mr. Sohn, just as it happened when the government tried to limit contagion from the subprime mortgage crisis two years ago through one-time bailouts.

Television images of the intensifying street demonstrations in Greece appear to have been an immediate trigger of Thursday’s sell-off on Wall Street.

“Rioting protesters in Athens are causing investors the world over to re-evaluate whether or not Greece will be able to deliver on its rather dramatic fiscal austerity program, given the level of civil unrest that is quickly spreading across the country,” said Mark Frey, a regional director at Custom House foreign-exchange firm.

“But at this point, Greece really isnt the markets primary concern. Contagion is the word of the day” as investors focus on the burgeoning debt problems weighing down not only Greece, but nearly every major developed country in the wake of the 2008 crisis.

Deutsche Bank, a major European investment house, predicted “a complete breakdown in trust” in Europe as Greek citizens defy the wishes of Germany, the Netherlands and France, which demanded cuts in salaries and pensions as well as steep tax increases as a condition of the bailout.

The only alternative for Greece at this point is to default or restructure its debts, and “contagion will become a scary reality” for countries such as Spain and Portugal, which face similar fates, Deutsche Bank said.

While the threat to the global economy is growing by the day, some analysts said, Thursday’s market action was exaggerated by an error by a Citigoup stock trader who typed in “16 billion” when he intended to sell “16 million” shares of Procter & Gamble Co., whose stock is included in the Dow index. The New York Stock Exchange and the bank said they are investigating the possibility of an error but had no evidence.

Citigroup is one of several major U.S. banks that would be hit hard by defaults in Europe, where U.S. banks hold an estimated $2.5 trillion in debt securities.

Bank stocks got drubbed in the market sell-off, falling by 5 percent on average. Banks also are vulnerable in light of legislation that would crack down on their lending and trading activities, which is making its way through the Senate.

The cascading crisis in Europe should be taken seriously in the U.S., said Mohammed El-Erian, senior strategist at Pimco, the world’s biggest bond fund.

“We’ve seen a crisis start in a country - Greece - become regional, impact the whole eurozone and is on the verge of truly going global,” he told CNBC. He said the U.S. could face a debt crisis within a few years.

“We are not Greece. We have more time,” he said. “But what the Greek crisis tells you is, debt and deficits matter. The structure of your deficits matter, and the U.S. doesn’t have much flexibility.” Like Greece, much of U.S. spending goes into income and transfer payments to U.S. retirees and other citizens, which can be difficult to rein in.

“Don’t underestimate how quickly this can happen,” Mr. El-Erian said. “There are structural head winds out there, and we’d better get our act together before those structural head winds become overwhelming.”

President Obama and congressional leaders have pledged to tackle the deficit after the fall elections, when a presidential panel will make recommendations on reforms in Social Security and other programs. Although politicians frequently rail against the debt, few have embraced potentially unpopular measures needed to get it under control.