Stocks down sharply as euro nears 2011 low

AP News
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Posted: Dec 14, 2011 11:56 AM
Stocks down sharply as euro nears 2011 low

Stock markets slid Wednesday as worries over the ability of European governments to get a handle on their debts also pushed the euro currency to an 11-month low below $1.30.

The euro was down 0.5 percent at $1.2981 by mid-afternoon, just up from its earlier low of $1.2968.

This is the first time the 17-nation currency bloc's currency has traded under $1.30 since January, and represents a fresh sign that Europe's deal last week to enforce more budgetary disciplines on the 17 eurozone countries is meeting with skepticism in the markets.

Meanwhile Europe's unresolved debt crisis kept the pressure on its indebted governments, with Italian borrowing costs rising again. The Italian government paid 6.47 percent interest to borrow euro3 billion ($3.95 billion) for five years at a bond auction, up from 6.30 percent just a month ago.

The Italian auction provided further evidence that the European deal last week to tighten rules on euro countries has not dealt with the underlying debt problems.

"The structural problems in the eurozone remain the market focus, as the governments that have signed up to the plan are now expressing doubts over the ratification process and whether parliamentary backing could be secured," said Chris Walker, an analyst at UBS. "This threatens a drawn-out process for fiscal consolidation which markets may not have much appetite for."

Those concerns have come as the economic newsflow continues to disappoint. In the broader eurozone economy, industrial production slipped 0.1 percent in a further sign of weakness many think will lead to a recession.

Meanwhile in Britain, which is outside the euro, figures showed unemployment hit its highest level for 17 years, with women and young people bearing the brunt of the deepening jobs crisis as the country's austerity measures and economic weakness began to bite.

Germany also reactivated its financial sector rescue fund in response to new questions about how its banks can cover their capital needs amid the continuing eurozone debt crisis.

Chancellor Angela Merkel's spokesman, Steffen Seibert, said the Cabinet decided to reopen the euro360 billion ($474 billion) fund, first established at the height of the 2008 financial crisis.

The fund closed to new applications at the end of 2010. But much of the money _ which totaled euro60 billion for potential capital injections and euro300 billion for loan guarantees _ remains untapped.

European authorities have determined that German banks require a total of euro13.1 billion in new capital to comply with tougher new requirements. The country's second-biggest bank, Commerzbank AG, has been told it needs euro5.3 billion.

In Europe, Germany's DAX closed down 1.7 percent at 5,675.14 while the CAC-40 in France fell 3.3 percent to 2,976.17. The FTSE 100 index of leading British shares ended 2.3 percent lower at 5,366.80.

In the U.S., the Dow Jones industrial average was down 1 percent at 11,836 while the broader Standard & Poor's 500 index fell 1.1 percent to 1,212.

Sentiment also remains undermined by the U.S. Federal Reserve's statement Tuesday that the U.S. economy, while improving, is still weak. Unemployment remains high, and it remains vulnerable to the European debt crisis, which could push the continent into a recession and slow U.S. growth.

"Overall, recent developments on both the economic and market fronts have been discouraging for market sentiment," said Nick Bennenbroek, an analyst at Wells Fargo Bank.

Analysts said markets were disappointed that the Fed refrained from a third round of large-scale purchases of Treasury securities, dubbed quantitative easing III or QE3.

Earlier, Asian shares closed lower. Japan's Nikkei 225 index fell 0.4 percent to end at 8,519.13, its lowest close in two weeks. South Korea's Kospi lost 0.3 percent at 1,857.75 and Hong Kong's Hang Seng shed 0.5 percent to 18,354.43.

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AP Business Writer Pamela Sampson in Bangkok contributed to this article.