Downgrade of Greece and Portugal Causes Prices to Plummet on Wall Street

On Tuesday, stock prices on Wall Street fell by about 2 percent as the downgrade of Greece and Portugal’s credit ratings triggered investor fears of instability in the eurozone economy.

The Dow Jones index plunged 1.9 percent to 10,991 points, marking its largest daily loss in three months. The S&P 500 tumbled 2.34 percent to 1,183 points, while the Nasdaq index lost 2.04 percent, diving to 2,471 points. Standard & Poor’s downgraded Greek government bonds by three notches to ‘junk’ status ‘BB+/B’, citing that the political options of the cash-strapped government in Athens are narrowing due to economic weakness. Standard & Poor’s also downgraded Portugal’s rating by two notches to ‘A-‘, stating that Lisbon will face difficulties in stabilizing its high public debt. After Greece requested financial assistance from the EU and the IMF on Friday, investors now fear that Portugal may have to do the same.

The extent of investor fear is reflected in yesterday’s spike of the VIX index on the Chicago Options Exchange, known as the ‘fear index’, which rose by 31 percent, marking its largest daily jump since October 2008. It reached 22.8 points, the highest level since February. Investors were also unsettled by the Senate hearing of Goldman Sachs representatives over allegations that the bank did not disclose all facts to investors when selling complex financial products, resulting in losses for those investors while Goldman Sachs profited. The S&P financial sector index plummeted 3.4 percent. “Investors fear that the allegations against Goldman will provide new arguments for the government to push for radical reform of the financial system, which has shaken bank stocks and the overall market,” says Jim Maguire, an analyst at E. H. Smith Jacobs.

The downgrade of Greece and Portugal caused a sharp decline in the euro against the dollar yesterday, leading to the European currency’s price dropping to 1.3144 dollars, the lowest level in nearly a year. The sudden strengthening of the dollar also caused a drop in commodity prices, with oil prices falling by more than 2 dollars to approximately 82 dollars per barrel. Consequently, the energy and mining sectors were among the biggest losers yesterday, with a decline of about 3 percent. European stock prices also sharply fell yesterday. The London FTSE index dropped 2.61 percent to 5,603 points, marking its largest daily decline in over five months. The Frankfurt DAX index fell by 2.73 percent to 6,159 points, while the Paris CAC dropped 3.82 percent to 3,844 points. (H)