Why Wall Street panicked

It was a fear-driven day on Wall St. as stocks plummeted nearly 1,000 points before recovering. As Farnoosh Torabi reports, investors grew increasingly worried about the debt crisis in Greece.
By David Cho
Washington Post Staff Writer
Thursday, May 6, 2010; 3:55 PM

For months, the words "financial crisis" seemed antiquated.

Wall Street profits were soaring once again. Economic growth returned. Our 401(k)s bulked back up. Massive, triple-digit losses in the Dow Jones Industrial Average seemed a thing of the past, or at least of early 2009.

For a day, at least, that optimistic sentiment evaporated. Panicked investors sold off everything they could and snapped up U.S. Treasuries, one of the safest investments on earth. The Dow Jones industrial index nearly dropped 1,000 points before recovering about half of those losses.

What happened?

In a word, Greece.

It seemed to sneak up on us, the issue of Greece indebtedness. The problem isn't complicated: the country borrowed way too much and now is struggling mightily to pay back what it owes. Now, its financiers in Germany and elsewhere in Europe are facing massive losses.

The danger had been percolating in Europe for a while. But only this week did it seem to sink in with U.S. investors how closely related Greek's problems were to our own. Some on this side of the Atlantic believed the rest of Europe would step in and provide a bailout to protect the rest of the continent. Now some believe the package that was announced by the European Union and the International Monetary Fund won't work or won't be enough, raising questions about how the European Central Bank has handled the crisis.

Greece alone can't take down the world's economy. But if the panic spreads to Spain, a very significant economy which is several times larger, the situation could become far more ominous, which is why so many investors are hitting the "sell" button on their trading desks.

Some of the dramatic fall and rise of the Dow today could have been aggravated by technical glitches and weird trading patterns.

But officials and market watchers say that the threat from Europe could significantly crimp what has been a fairly good recovery. Some economists say it is akin to the Asian financial crises that gripped the markets more than a decade ago.

The question is whether we -- now out of the fire of Wall Street's financial crisis of our country's own making -- are confronting a new peril out of Europe.

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