U.S. stocks plummeted on Monday as panic sets off if the problem in Greece could affect the world financial system. The Dow Jones industrial average dropped 2% or 35.33 points, closing at 17,596.35. The NASDAQ composite lost 2.4% or 122.04 points that close at 4,958.47, while the Standard & Poor’s 500 index fell 2.1% or 43.85 points, and closed at 2,057.64. The deficits eliminated the Dow and S&P gains this year.
Investors opted for government stocks instead of the US and Europe stocks for reasons of security.
Greece was forced not to pay its debts because of the events that occurred last weekend. Alexis Tsipras, prime minister of Greece, said that the country’s lenders will hold a referendum on budget proposals. The officials of EU have declined to extend the bailout program of Greece, which is due to expire Tuesday. Greece is scheduled to pay its debt to the International Monetary Fund on the same day.
Senior partner Jeff Carbone of Cornerstone Financial Partners said that the real issue is contagion risk and not Greece. “Greece economy is approximately the same as Missouri’s,” he said. “Who will come next after Greece? What happens after this occurrence is the real problem and not about Greece,” Carbone added.
In Europe, CAD-40 of France fell 3.7%, Dax of Germany dropped to 3.6%, and the FTSE 100 index (the leading shares in UK) loss 2%. The stock market in Greece was closed.
Investors opted for the UK and Germany government bonds, as these are safer.
Greece’s government-issued bonds, on the other hand, were sold that resulted to higher returns.
David Lafferty, Natixis Global Asset Management chief market strategist said that they are actually considering at a scenario where the market has no idea of how things will be. The U.S. market, however, feels that it is almost contained at present.
The European Central Bank declined to grant Greece’s banking system its emergency support that made the country’s government to shut banks and to set limits on withdrawals. Long queues in Athen’s ATM machines were seen on TV screens globally.
Scenes like these trigger panic and investors worry that it might broaden. It will definitely upset the European market temporarily, but the long-term impact is not that significant for U.S. investors.
The decision of Greece to hold a referendum was interpreted by S&P as an indication of putting local politics over economic and financial stability, payments of commercial debt, and membership in the Euro zone. It sees that Greece will more likely slump the euro.
The global financial markets will be disturbed if Greece defaults to a new currency. However, the 2008 crisis is unlikely to happen this time.
Mark Zandi, Moody’s Analytics chief economist, stated that the European banks have settled most of their debt from Greece and have increased their capital significantly. He further said that the economy of Greece will suffer if the country defaults and exits from the Euro zone. “The financial markets will be disturbed with the Greek standoff, but this is only short term,” Zandi said.
Although measures of instability rose, investors said that they are not as anxious as before.