New York – Worsening Greek Debt Crisis Sinks Stocks

New York – Stocks plunged Wednesday as unrest in Greece threatened to further destabilize global financial markets. Major indexes had their biggest drop since June 1.

Investors piled into lower-risk assets like the dollar and U.S. government bonds. Both rose sharply.

If Greece defaults on its debt it could cause investors to dump the bonds of other weak European countries like Portugal, Spain and Ireland, raising borrowing costs for those countries. It could also cause the dollar to further strengthen against the euro, which would hurt U.S. exporters.

June is shaping up to be the worst month for the stock market since May 2010. Stocks have only risen on three days so far this month and have fallen for the other 11. The Dow Jones industrial average and the Standard & Poor’s 500 index are now 7.3 percent below their recent highs reached in late April.

“It’s sell and ask questions later,” said Steven Goldman, chief market strategist at Weeden & Co. in Greenwich, Conn.

A report on manufacturing in the New York area also came in far below forecasts. That reignited fears that factory production, one of the few bright spots in the U.S. economy, may be weaker than many economists had believed.

The Dow Jones industrial average fell 178 points, or 1.5 percent, to 11,899, giving up its 123-point gain from Tuesday. The Dow has only had three days of gains in June.

The Standard & Poor’s 500 index fell 22, or 1.7 percent, to 1,266. The Nasdaq composite fell 47, or 1.6 percent, to 2,631.

The technology-heavy Nasdaq index is now down 0.6 percent for the year. The S&P 500 is up less than 1 percent, while the Dow is up about 3 percent.

The euro slid more than 1 percent against the dollar as the worsening Greek debt crisis undermined confidence in Europe’s shared currency. U.S. government bond prices climbed as investors sought out safer assets.

Thousands of people gathered on the streets of Athens to protest government cutbacks required to avoid a default on the government’s debt. Demonstrators hurled rocks at riot police, who responded with tear gas. Greece’s prime minister said he would reshuffle his Cabinet and seek a vote of confidence after coalition talks with opposition parties failed.

In the latest sign of how Greece’s problems could affect other countries, credit ratings agency Moody’s said it may downgrade its ratings of France’s three largest banks because of their exposure to Greek debt.

Worries about Greece have contributed to a drop in U.S. stocks since late April. If Greece defaults on its debt, it would cause borrowing costs for other debt-ridden European countries like Spain and Portugal to soar as investors shun their debt. That could slow economic growth across the continent and throughout the rest of the world.

A Greek default would further weaken the euro and that could also put pressure on U.S. companies that do much of their business overseas. U.S. corporations have benefited from a weak dollar, which has made their exports more competitive in global markets.

Greece’s fiscal problems appeared to be solved a year ago with a package of emergency loans, but it became clear this spring that the country would need more help from its European neighbors to avoid a default. On Monday, Standard & Poor’s slashed Greece’s creditworthiness to the bottom of the 131 countries that have ratings.

Analysts said investors should expect stock trading to be volatile as uncertainty about the economy persists. The housing market remains weak and the jobs market is sluggish. Questions loom about whether lawmakers will support raising the nation’s borrowing limit by an Aug. 2 deadline. The Federal Reserve’s $600 billion bond-buying program is also winding down at the end of June. The program was designed to keep interest rates low to encourage borrowing.

“The markets are nervous, investors are nervous, and so we expect volatility,” said Oliver Pursche, president of Gary Goldberg Financial Services.

The Dow is down 5 percent this month, while the S&P and Nasdaq are both down 6 percent.