GLOBAL MARKETS-Euro, stocks plunge on soaring Italian yields

Wed Nov 9, 2011 2:58pm EST

* Dow industrials fall nearly 400 points, euro off 2 pct
    * Italian 2- and 10-year yields rise above 7 percent

    By Rodrigo Campos
    NEW YORK, Nov 9 (Reuters) - Stocks and the euro plunged on
Wednesday as Italian borrowing costs spiked, raising fears the
country will be forced to seek a bailout that could overwhelm
the euro zone's finances and push the region into a recession.
    Yields on two- and 10-year Italian bonds rose above 7
percent, a level at which the cost of financing a more than 2
trillion euro debt burden is seen as becoming unsustainable.
    Investors are concerned the euro zone and international
lenders would struggle to assemble a bailout of sufficient size
for Italy, which is the euro zone's third-largest economy.
    "Italy's latest debt woes signal a new, even more dangerous
phase in Europe's debt crisis," said Mohamed El-Erian, co-chief
investment officer at PIMCO, which is home to the world's
largest bond fund and a holder itself of Italian sovereign
debt.Key measures of risk aversion rose to levels not seen since
last summer, when investors grappled with the initial round of
the debt crisis.
    The search for safety lifted U.S. Treasury prices, even as
yields continued to shrink. The benchmark 10-year U.S. Treasury
note was up 1-2/32 with the yield at 1.96 percent.
    Assets perceived as risky fell.
    In afternoon trading in New York, the Dow Jones industrial
average fell 390.37 points, or 3.21 percent, to
11,779.81. The S&P 500 lost 45.10 points, or 3.53
percent, to 1,230.82. The Nasdaq Composite dropped
100.84 points, or 3.70 percent, to 2,626.65.
    The KBW bank index slid 4.95 percent, and the S&P
financial index was off 4.6 percent. Morgan Stanley shares fell 7.91 percent and Goldman Sachs lost
7.23 percent.
    World stocks as measured by MSCI were down
2.6 percent, while in Europe the FTSEurofirst 300 
ended down 1.8 percent.
    The STOXX Europe 600 Banks index slid 3.7 percent,
weighed by a 6.8 percent fall for leading Italian lender
UniCredit , which holds 38.6 billion euros of Italian
government debt.
    U.S. dollar-denominated Nikkei futures fell 2.3
percent.EURO TUMBLES
    Traders said the European Central Bank bought Italian debt
aggressively on Wednesday in an attempt to lower yields. Mark
McCormick, a strategist at Brown Brothers Harriman in New York,
said the ECB may be forced to increase those purchases or to
cut interest rates again next month, all of which should weigh
on the euro. The ECB cut rates to 1.25 percent last week.
    "All of this is adding to the case for more economic
weakness in the euro zone as a whole and recent manufacturing
data suggests things are getting worse," McCormick said.
    The euro slid more than 2 percent versus the
greenback and the yen and 0.5 percent against the
Swiss franc .
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