Wall Street dives on European debt worries

Spencer Platt / Getty Images

A trader works on the floor of the New York Stock Exchange. Wall Street took a tumble at Tuesday's opening bell after a surprise decision by the Greek Prime Minister to call a referendum.

By msnbc.com news services

Wall Street fell sharply Tuesday, following Europe?s major stock markets lower, after a proposed referendum in Greece threatened to overturn a European bailout plan to contain the region?s sovereign debt crisis.

Analysts said if Greek voters reject the unpopular bailout, it would result in a "hard default" by Greece, causing bigger losses for banks and raising the threat of systemic risk.

Greek Premier George Papandreou shocked global markets late Monday by announcing that he will put the nation's recent bailout deal through a referendum, potentially undoing last week's long-awaited agreement by EU leaders.

The news slammed European stocks, particularly the region's banks. The Dow Jones industrial average fell sharply at the start of trading and had lost as much as?321 points by mid-session. As stocks tumbled, a widely-watched gauge of investor fear, the VIX index, jumped some 25 percent, chalking up its biggest daily gain since mid-August.

U.S. stocks briefly pared losses after the leaders of Germany and France said they were determined to fully implement decisions made at the European Union Summit last week. Leaders of the big euro zone countries hastily arranged a crisis meeting with Papandreou on Wednesday in Cannes, a day before the start of a G20 summit.

"This was completely unanticipated," said John Canally investment strategist and economist for LPL Financial in Boston. "This vote in Greece is going to hang over the market for next week or so, unfortunately."

The Greek vote could potentially threaten a comprehensive plan to resolve the European debt crisis reached just last week in which euro zone leaders agreed that private holders of Greek bonds should take a 50 percent loss on their holdings.

Greece could potentially face bankruptcy if the population ends up voting against the EU?s latest financial aid package in a referendum, the chairman of the Eurogroup countries said.

Jean-Claude Juncker said Tuesday the referendum decision had piled ?great nervousness and insecurity? on top of an already highly insecure situation for the euro zone economy, telling RTL Radio:

?I cannot exclude that this would be the case, but it depends on how exactly the question is formulated and on what exactly the Greek people will vote on.? He added: ?It is something that brings a great nervousness, that adds great insecurity to already great insecurity and therefore we need to see calmly how we will deal with this.?

On Monday, U.S. market sentiment was already turning sour after U.S. brokerage firm MF Global filed for bankruptcy amid reports that it had bought too much bad European debt and fears over the public finances of Italy, the euro zone's third-largest economy.

In Tuesday?s economic news, an industry report showed the pace of growth in the U.S. manufacturing sector unexpectedly slowed in October. As well as monitoring the turn of events in Europe, investors have a raft of economic news to digest this week, culminating in Friday's monthly jobs report.

The Associated Press and Reuters contributed to this report.

Source: http://bottomline.msnbc.msn.com/_news/2011/11/01/8578805-wall-street-dives-on-european-debt-worries

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