European Debt Crisis Tightens Its Chokehold on Global Markets

A trader on the floor of the New York Stock Exchange on Tuesday, where the Dow Jones industrial average fell about 2.5 percent. The European debt crisis demonstrated again on Tuesday the chokehold it maintains on investors worldwide, as a surprise move by Greece to put the terms of its planned bailout to a public referendum battered global financial markets. Meanwhile, the bankruptcy of the brokerage firm MF Global sent some ripples through the markets, reducing trading volumes as its traders were barred from commodity exchange floors in Chicago and New York, but analysts and traders said its effects were minor compared with the actions in Greece. Declines that started in Asia accelerated in Europe — where the major indexes slumped 5 percent. Bank stocks led the sell-offs, and the broad United States stock market slid nearly 3 percent. In the credit markets, crucial stress gauges moved toward recent highs, while rising interest rates on Italian debt underscored investors’ growing doubts about that highly indebted country, which has become the new focus of concern in the euro zone. “It is all Europe right now,” said Eric Green, an economist at TD Securities in New York. The Greek referendum threatened to undo the work of the summit meeting last week in Brussels, where leaders outlined a rescue plan that cheered markets and contributed to the biggest monthly United States stock market rally in October since 1982. “The markets don’t know which way to look,” said Andrew Wilkinson, an economist at Miller Tabak & Company. “This has absolutely blindsided markets.” The declines in Europe wiped out the exuberant gains of last week after the Brussels deal, which initially led some investors to believe Europe was addressing the Greek problem. The reversal in Greek markets included insurance contracts on bonds pricing in a higher likelihood of default. Even last week doubts grew that the grand European plan would be enough to stop the crisis from spreading to Italy, a much bigger economy that has to refinance billions of euros of debt in the coming year. Italy has a small budget deficit of about 3 percent of its gross domestic product, which means it has a relatively small amount of net new borrowing to do, although this percentage may be revised upward if growth slows next year as expected. The much bigger problem is its mountain of existing debt that must be rolled over as it matures — about 52 billion euros this year and 307 billion more next year, according to Tobias Blattner, an economist at Daiwa Securities in London. As Italy’s borrowing costs shoot up — the 10-year government bond yield jumped to a record 6.33 percent on Tuesday — investors are concerned that too much of its strained budget will be consumed by the costs of its enormous debt. In signs of a reappearance of stress in the European credit markets, the rates that banks charge to lend euros to one another rose, and the costs to banks of swapping euros for dollars in the open foreign exchange market — the three-month euro-dollar cross-currency basis swap — also increased sharply. The cost of insuring the debt of a basket of European banks against default rose to the highest level since Oct. 5. It now costs $261,000 to insure $10 million of bank debt annually for five years, compared with $207,000 at the end of last week, according to the data provider Markit. Analysts said European leaders had so far failed to come up with a clear solution to cope with a problem on the scale of Italy’s debt. Officials had proposed maximizing the European bailout fund, though they did not offer details, and in particular had not defined a role for the European Central Bank, analysts said. The central bank was buying bonds to support the Italian bond market on a large scale on Tuesday, traders said. But many analysts say it is inevitable that the central bank will have to act much more aggressively, in effect printing money by buying hundreds of billions of euros of bonds from peripheral countries like Italy. Such an action, however, is politically poisonous in countries like Germany where the public fears inflation. It would be a big test for Mario Draghi, the new president of the European Central Bank, whose first day in office was Tuesday. “We are going to have an escalation of the crisis until the E.C.B. steps in,” said Holger Schmieding, an economist at Berenberg Bank. “It will have to signal very clearly that it will not let a solvent sovereign go. Following the bankruptcy of MF Global, the New York Stock Exchange on Tuesday delisted its stock from trading. Mike Zarembski of OptionsXpress said the bankruptcy of the firm, a large player in the commodities markets, had temporarily reduced volumes in those markets in Chicago and New York. Floor brokers and traders who cleared their trades through MF Global on Monday were barred from the trading floors. In New York, the Standard & Poor’s 500-stock index dropped 2.79 percent, or 35.02 points, to 1,218.28, and the Dow Jones industrial average fell 2.48 percent, or nearly 300 points, to 11,657.96. The Nasdaq composite index was down about 2.9 percent at 2,606.96. In Europe, the sentiment had been even more negative. The Euro Stoxx 50 index closed down 5.3 percent, the German DAX down 5 percent and the French CAC 40 down 5.4 percent. In Britain, which is not a member of the euro zone but trades heavily with its Continental neighbors, the FTSE 100 index was down 2.2 percent. As they have repeatedly in recent months, bank stocks led the broader markets sharply lower. Financial stocks fell 4.7 percent in the United States, and nearly twice that in Europe. The benchmark 10-year United States note yield dipped to 1.97 percent, from 2.12 percent, on Monday. The euro fluctuated during the day amid uncertainty over how the developments in Greece would affect the latest debt deal. The euro, which started the day at nearly $1.39, declined to $1.36 before rising again to nearly $1.37 in the late afternoon. “When they called for the referendum, that weighed on the euro,” Eric Viloria, senior market strategist for  Forex.com. “We have already bounced back up because it has been rumored that the referendum is already dead,” he said, referring to news reports that the government might fall.