Correction to This Article
The article incorrectly said that a flight by investors to U.S. Treasury securities drove down the value of the U.S. dollar. It should have said the flight drove up the value of the dollar. Also, a graphic that accompanied the article mislabeled the euro-dollar exchange rate. It should have read "Euros per dollar," not "Dollars per euro."

Fear of E.U. economic woes, rise in U.S. jobless claims send markets plunging

SOURCE: | The Washington Post - February 5, 2010
By Ylan Q. Mui and Steven Mufson
Washington Post Staff Writer
Friday, February 5, 2010

Fears about financial crises in the wobbling economies of southern Europe and an unexpected increase in U.S. jobless claims sent global stock markets reeling Thursday, posing new challenges for the European Union and the U.S. economic recovery.

Despite several pieces of upbeat economic data at home, the Dow Jones industrial average plunged 2.6 percent, finishing just two points above the 10,000 threshold it first crossed in 1999. Broader U.S. and foreign market indices fell about 3 percent, and oil prices fell 5 percent. The euro fell to its lowest level against the dollar since May.

What began in recent days as anxiety about the solvency of Greece and the prospect of labor unrest there spread to worry about Portugal's budget and Spain's housing bubble, then to concerns about how Europe's richer nations might come to the rescue of weaker sisters sharing the common euro currency.

Investors fled to the relative safety of U.S. Treasury securities and drove down the value of the dollar, which could dampen the global appetite for U.S. exports needed to boost economic recovery in the United States.

Driven by concerns that stubborn 10 percent U.S. unemployment levels would further slow the recovery, President Obama met with congressional leaders Thursday to discuss a new stimulus program as the Senate prepared to roll out an $81 billion jobs bill.

Some analysts said investors were taking profits in U.S. markets after stock advances in recent months. "We ran up way too fast," said Thomas Francis Nordby, a market strategist for Lind-Waldock. "There is a great deal of fear and anxiety back in the market."

One spark for the day's turmoil came from Greece, where the recently elected government of Prime Minister George Papandreou is struggling to reduce its huge budget deficit, which hit 12.7 percent of gross domestic product last year. Despite a televised Tuesday-night appeal for unity by Papandreou, Greece's biggest union approved a mass strike Thursday to protest spending cuts, and tax collectors began a 48-hour walkout, raising doubts about the government's ability to fulfill its plans.

Goldman Sachs, which was an underwriter of a successful $11 billion Greek government bond offering Jan. 25, nonetheless issued a downbeat report Thursday about the country's prospects, saying it was "facing both liquidity and (potentially) solvency issues" and would need to borrow from "non-commercial sources."

"Greece -- and indeed the Euro-zone -- is facing its biggest challenge since the establishment of the single currency," Goldman said. The report said the crisis "has placed a major question mark over" the assumptions "at the core" of the 16-nation euro zone -- that member states would coordinate fiscal policies and undertake structural reforms.

Banking and trading sources who would speak only on the condition of anonymity said bond traders, mostly based in the United States, drove down the price of Greek, Spanish and Portuguese government debt, sharply raising borrowing costs for those nations. Sources in Europe said many European asset managers saw the turmoil as an opportunity and were buying that debt Thursday, preventing an even bigger drop.

European Central Bank President Jean-Claude Trichet said Thursday that the euro should not be punished for Greece's problems. He asserted that the 16 euro zone countries would run a combined deficit smaller than those of the United States and Japan. But, given the record U.S. budget deficit projected by the Obama administration, that provided small solace to traders.

In the United States, investors began dumping stocks minutes after the opening bell and the major market indices stayed in negative territory all day. Commodity and energy stocks led the declines, which were the biggest in a single day this year. U.S. markets are now down for the year: The Standard & Poor's 500-stock index is down 4.7 percent, the Nasdaq Stock Market is down 6.3 percent and the Dow is down 4.1 percent. The slide spread to Asia on Friday, as Japan's benchmark Nikkei 225 average fell by as much as 2.6 percent in early trading.

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