World markets plunge on European debt fears

(AP) — Stock markets in Portugal, Spain and Greece led a sharp global retreat for the second day running Thursday as investors fretted over their governments' ability to get a grip on their borrowings. The euro plunged towards $1.37, hitting its lowest since May.

In Europe, the FTSE 100 index of leading British shares closed down 113.84 points, or 2.2 percent, at 5,139.31 while Germany's DAX slid 138.85 points, or 2.5 percent, to 5,533.24. The CAC-40 in France ended 104.22 points, or 2.8 percent, lower at 3,689.25.

Even worse were the stock markets in the three debt-ridden economies of southern Europe — Greece's main composite index was down 3.3 percent, while Spain's IBEX slid 5.9 percent and Portugal's PSI 20 slumped 5 percent.

The selling pressure accentuated after weak U.S. jobless claims reinforced market fears that Friday's closely watched nonfarm payrolls data will be weaker than anticipated — the Dow Jones industrial average was down 204.28 points, or 2 percent, at 10,066.27 around midday New York time while the broader Standard & Poor's 500 index slid 24.70 points, or 2.6 percent, at 1,072.58.

"It's a bloodbath out there and Greece is to blame; this theme of sovereign debt risk is rife and at the forefront of investors' concerns," said Neil Mackinnon, global macro strategist at VTB Capital.

"The markets are not convinced that the Greek government can achieve its targets and that is reflected in contagion elsewhere," he added.

European Central Bank president Jean-Claude Trichet did his best earlier to dampen down market concerns surrounding Greece.

Though he said it was "absolutely crucial" that the Greek government stick to its plan to get the budget deficit down from a staggering 12.7 percent of the country's gross domestic product in 2009 to below 3 percent in 2012, he said he was "confident" that it would achieve its goals.

Despite his backing, which followed the European Commission's cautious acceptance of the Greek plan on Wednesday, the markets remain unconvinced that Greece can pull it off and are increasingly coming round to the view that Portugal and Spain, in particular, will face mounting difficulties dealing with their own budgetary difficulties — on Wednesday, Portugal cut a planned bond issue and Spain said its deficits will be more than anticipated in the next three years.

"This week's story is Greece, next week's could be Portugal and next month could be Spain and maybe even Italy," said David Buik, markets analyst at BGC Partners.

"The next quarter — who knows it could be the UK and next year the U.S; these massive government borrowing requirements are dangerous and will not go away and equities are uncomfortable," added Buik.

Trichet's attempt to douse the flames came after the bank kept its interest rate unchanged for the ninth month running at 1 percent and indicated that borrowing costs were unlikely to rise any time soon, partly because of the debt difficulties afflicting some of the eurozone's countries.

"While the European Central Bank is right to refuse to make any commitments towards those countries which struggle to bring public finances under control, the impact of the crisis may yet force them to leave interest rates lower for longer," said Jorg Radeke, economist at the Centre for Economic and Business Research.

The prospect that European interest rates will stay low for longer was another reason why the euro plunged — by late afternoon London time, the euro was down 1.2 percent on the day at $1.3729, its lowest level since May 2009. The dollar fared less well against the yen, considered even more of a safe haven currency than the dollar, falling 1.9 percent at 89.20 yen.

Earlier, Asian stocks retreated in the wake of Wall Street's decline Wednesday.

Japan's Nikkei 225 stock average fell 48.35 points, or 0.5 percent, to 10,355.98 with Toyota continuing to drag on the market as the world's largest automaker grappled with a global recall.

It closed down 3.5 percent before announcing after the bell it returned to profit last quarter and had raised its annual earnings forecast. The results, however, didn't reflect damage from the massive recalls linked to faulty gas pedals.

Elsewhere, Hong Kong's Hang Seng tumbled 1.8 percent to 20,341.64 and Shanghai's main index fell 0.3 percent. Down most of the day, South Korea's market recovered to add 0.1 percent.

Oil prices plunged too, with benchmark crude for March delivery off $2.77 at $74.21, while gold fell $38 an ounce, or 3.4 percent, to $1.073.40.

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AP Business Writer Jeremiah Marquez in Hong Kong contributed to this report.