Defaults spook investors, global stocks tumble

By Herbert Lash

NEW YORK (Reuters) - Resurgent credit worries upended financial markets in Europe and the United States on Thursday and the dollar tumbled to new lows as the European Central Bank's hawkish inflation statements raised concerns over a widening trans-Atlantic interest rate gap.

A steady flow of chilling news and speculation, including talk that UBS (UBSN.VX) was trying to offload $24 billion of less-than-prime mortgages, put dealers on edge and pushed up safe-haven U.S. government debt.

The dollar fell to lifetime lows against the euro and oil held firm after hitting a new high near $106 as the weak dollar helped extend gains from the previous day. Gold retreated from record highs set the day before.

News that U.S. home foreclosures rose to record highs in the fourth quarter also added to bearish investor sentiment across equity, debt and currency markets.

"The big story in the market is the forced liquidation of mortgage securities, which is just driving everything," said Carl Lantz, U.S. interest-rate strategist with Credit Suisse in New York. "It is driving a flight-to-quality bid," he said.

European shares closed down 1.4 percent and major U.S. indices were more than 1 percent lower a midday, pulled down by default notices at U.S. home lender Thornburg Mortgage and a Dutch-listed affiliate of private equity firm Carlyle Group.

The Dow Jones industrial average .DJI was down 140.02 points, or 1.14 percent, at 12,114.97. The Standard & Poor's 500 Index .SPX was down 19.67 points, or 1.47 percent, at 1,314.03. The Nasdaq Composite Index .IXIC was down 26.18 points, or 1.15 percent, at 2,246.63.

Michael Metz, chief investment strategist at Oppenheimer & Co in New York, said the U.S. economy has never been as leveraged, and with real estate prices declining, pressure on consumers to pay back debts is rising.

"This is the worst I've ever seen because there really are systemic risks, and unfortunately we come off a period where the secret to American prosperity was leverage, nothing more, nothing less," said Metz, who has been active in the financial markets since the Arab oil embargo of 1973.

"The bottom line is we have to go through a market process of de-leveraging and it's going to be painful and protracted."

The credit market pressures pushed spreads for some debt products to all-time highs. U.S. Treasuries prices jumped, meanwhile. as investors snapped up the government securities as safe havens against repayment failures.

Shares of mortgage lender Thornburg plummeted on worries it might go bankrupt after the provider of jumbo loans failed to meet a $28 million margin call from JPMorgan Chase & Co, triggered defaults under other lending agreements.

Margin calls force borrowers to pay back loans or post more collateral. Thornburg shares, which traded above $27 before it was hit by the credit crunch last summer, plunged 60 percent to $1.36 in morning trading.

Money manager Carlyle Capital Corp CARC.AS said it received margin calls totaling more than $37 million from seven parties on Wednesday and was unable to meet the demands for extra collateral to cover market positions for four of them. As of February Carlyle Capital had a $21.7 billion portfolio of U.S. mortgage-backed securities issued by Fannie Mae (FNM.N) and Freddie Mac (FRE.N).

The FTSEurofirst 300 index .FTEU3 closed unofficially down 1.4 percent at 1,282.77 in a volatile session mirroring losses in U.S. markets.