Europe debt crisis fears hammer euro, stocks

NEW YORK Fri Sep 9, 2011 5:59pm EDT

Trader react at their desks at the Frankfurt stock exchange September 5, 2011. REUTERS/Alex Domanski

Trader react at their desks at the Frankfurt stock exchange September 5, 2011.

Credit: Reuters/Alex Domanski

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NEW YORK (Reuters) - Growing doubts about Europe's ability to resolve its debt crisis punished the euro and world stock markets on Friday, while G7 finance ministers met to discuss measures to revive economic growth.

The euro hit 6-1/2 month lows against the U.S. dollar on nervousness over the outcome of a Greek debt swap deal and on jitters fueled by the planned resignation of Juergen Stark, the top German on the European Central Bank's board, in protest over its controversial bond-buying program.

Bond buying has been one of the ECB's main weapons in fighting the debt crisis. The Stark news kindled uncertainty over internal ECB support for it and pummeled the euro a day after a sell-off on the ECB backing away from further interest rate rises.

The nervousness fueled safe-haven buying of German and U.S. government debt. The 10-year Bund yield hit another record low, while 10-year U.S. Treasuries yields touched a 60-year trough.

"Europe is the No. 1 thing causing pressure on the market as the realization grows that what we've done so far hasn't worked," said Liz Ann Sonders, the New York-based chief investment strategist at Charles Schwab Corp, which has $1.65 trillion in client assets.

Stark's departure highlighted divisions within the ECB on the handling of Europe's debt woes. The ECB later confirmed Stark will step down at the end of the year.

"When you get a new story like this, that there's internal turmoil on the ECB, that immediately has implications for the bond-buying program, which immediately has implications on the capital level in European banks," said Jack de Gan, chief investment officer at Harbor Advisory Corp in Portsmouth, New Hampshire.

Traders, surprised by the Stark news, were keeping tabs on developments with Greece's debt swap. The deal is critical for Athens to secure a second 109 billion euro bailout and avert a near-term default that could ripple across Europe and the global banking system.

Banks and insurers face a Friday deadline to indicate whether they will join an exchange of Greek debt, part of an international bailout package agreed in July. It is expected 70 percent of the private investors would agree to such a move, below the 90 percent threshold that Greece has said it wants to go through with the deal.

The cost to insure Greek sovereign debt for five years surged to a record high of 3,106 basis points, up nearly 300 basis points on the day, according to data vendor Markit.

Finance ministers and central bankers from the Group of Seven industrialized nations met in Marseille, where host France has called for a coordinated response from G7 members to deal with Europe's debt crisis and the region's shaky banks.

After the meeting, officials said they agreed on a coordinated response to the slowdown in world growth and are prepared to supply funds to banks and to support financial markets.

In the United States, President Barack Obama unveiled his $447 billion plan to revive economic growth late on Thursday, but investors worried that Congress would not pass the measure and the Federal Reserve may not follow quickly enough with its own action.

Fed Chairman Ben Bernanke, in a speech on Thursday, left the door open for more monetary stimulus but withheld details on the timing and what type of measures the Fed would enact.

The Dow Jones industrial average .DJI finished down 303.68 points, or 2.69 percent, at 10,992.13. The Standard & Poor's 500 Index .SPX ended 31.67 points lower, or 2.67 percent, at 1,154.23. The Nasdaq Composite Index .IXIC closed down 61.15 points, or 2.42 percent, at 2,467.99.

For the week, the Dow fell 2.2 percent; the S&P 500 lost 1.7 percent and the Nasdaq slipped 0.5 percent.

The FTSEurofirst 300 index of top European shares .FTEU3 lost 2.6 percent on the day and the MSCI world equity index .MIWD00000PUS was off 3.2 percent. Both indexes were down 3.7 percent on the week, their third-largest drop in the past 12 months.

Earlier, Tokyo's benchmark Nikkei .N225 ended down 0.6 percent, bringing its weekly loss to 2.4 percent.

Another retreat in equities boosted safe-haven German and U.S. government bond prices. The 10-year Bund yield touched an all-time low of 1.74 percent, while the benchmark 10-year U.S. Treasury <US10YT=RR) yield ended at 1.925 percent after touching 1.896 percent, the lowest in at least 60 years.

The euro EUR=EBS was last down 1.6 percent against the dollar at $1.3668 after touching its lowest in 6-1/2 months at $1.3627. The single currency has fallen 5 percent in September.

Gold slipped after soaring to a record high above $1,900 an ounce earlier this week due to its appeal as both a safe haven and a hedge against inflation. It ended down 0.6 percent at $1,860 an ounce as nervous investors sold the metal on growing concerns its run-up had been overdone.

(Reporting by Ryan Vlastelica, Rodrigo Campos, Emily Flitter, Barani Krishnan and Nick Olivari; Writing by Richard Leong; Editing by Dan Grebler)

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Comments (2)
Intriped wrote:
The Euro is over valued.

Sep 09, 2011 6:51am EDT  --  Report as abuse
iq160 wrote:
The Euro is a failure as it is presently structured. It has tied together the monetary policies of it’s member countries while leaving their fiscal policies separate. That is what allowed countries like Greece to lie about their deficits and borrow at well below risk based on Germany’s strength (fiscal policy).

There’s only two ways out of this disaster:
1) Break apart the Eurodollar and return to individual currencies;
2) Tie the fiscal policies together by creating ceding fiscal
sovereingty of the member countries to the EU.

I suppose there is a third way which is to sit in today’s stasis and just keep shipping the wealth of Germany and France to Italy, Greece and the other European laggards. I don’t see that as a long term solution though.

It’s pretty clear that the real implications of the Euro-dollar zone were never explained to the European public. One of the biggest factions pushing hard for ever more integration in Europe was a group that wanted the EU to be bigger than the US; an inferiority complex. To that end, it’s they pushed the rosy picture of the EU-dollar while hiding the real agenda of a “United States of Europe”.

One should always do what’s best for themselves rather than what they think hurts others.

My last comment is that the G7 countries should NOT be involved in bailing out Europe. After all, more than half of the G7 is outside the Euro-dollar zone: USA, Canada, Japan, and the UK. Skip the IMF too as that’s sucking more out of us and we never get any consideration in return.

Sep 09, 2011 7:27pm EDT  --  Report as abuse
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