By Ylan Q. Mui and Steven Mufson
Washington Post Staff Writer
Friday, February 5, 2010; A01
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.
"Global trading action is dominating the markets," said Fred Dickson, chief market strategist for the Davidson Co. "Concern about euro stability is right now the wild card."
The global panic eclipsed new domestic data that would probably have been welcomed as signs that that worst is over for the U.S. economy. Non-farm business productivity rose at an annual rate of 6.2 percent during the fourth quarter, the Bureau of Labor Statistics reported Thursday. The data also showed a 1 percent gain in the number of hours worked, the first rise since 2007.
In addition, new orders at factories jumped by a surprising 1 percent in December, marking the eighth time in nine months that orders have risen. The increase is also significant considering that inventories of durable goods have been dropping for the past year and were down 0.2 percent in December.
"All of those things point directly toward recovery, but it's being overshadowed by this huge dark cloud of potential contagion in sovereign debt," said James Cox, managing partner at Harris Financial Group.
Consumers also provided a bright spot as about three dozen of the nation's biggest retailers reported better-than-expected results for January. Sales at established stores rose 3 percent last month, according to the International Council of Shopping Centers, a trade group. Apparel stores had a particularly strong month, rising 6.4 percent, the biggest increase since March 2007.
"The modest pickup in retail spending is persisting despite challenges ranging from income constraints to bad weather," said Frank Badillo, senior economist with consultant Kantar Retail.
But Badillo cautioned that the road to recovery will remain uneven as long as unemployment concerns persist. The Labor Department said initial claims reached 480,000 last week, up 8,000 from the previous week. On Friday, the agency is scheduled to release its much-anticipated monthly unemployment figures.
Senate Democrats said Thursday they hope to vote on a "jobs agenda" next week, including tax cuts for businesses that hire new workers and government funding for infrastructure projects.
The ideas that Democrats offered Thursday did not include the centerpiece of the administration's jobs plan: a $30 billion program to help small banks make loans to small businesses. Some senators are reluctant to end restrictions on banks that take federal money, aides said.
Staff writers Renae Merle and Binyamin Appelbaum contributed to this report.