S&P 500 briefly enters bear market on worries about Europe

Greece weeks away from bankruptcy

The Standard & Poor's (S&P) 500 index fell 1.6 per cent early Tuesday, bringing it into what many consider to be a bear market, but later recovered ground.

The yield on the 10-year Treasury note fell near a record low as investors piled into lower-risk assets.

Stocks fell broadly as investors worried that Greece might be edging closer to default, which would cause heavy losses for banks that hold Greek debt and rattle global financial markets.

Greece has said it would not be able to make budget cuts it had agreed to as part of a deal to receive emergency loans.

However, stocks closed with a late-afternoon rally on reports that European officials were working on a plan to prop up the region's struggling banks.

The jump erased earlier losses that put the S&P 500 index through the threshold, indicating a bear market. Concerns about Greece's debt sent the market down in early trading, but stocks regained some ground after United States Federal Reserve Chairman Ben Bernanke said the central bank can take more steps to stimulate the economy.

The Dow closed with a gain of 153 points, or 1.4 per cent, to 10,809. The S&P 500 gained 25, or 2.2 per cent, to 1,124. The Nasdaq rose 69, or three per cent, to 2,405.

Earlier, the yield on the 10-year Treasury fell to 1.72 per cent, just above its record low of 1.71 per cent reached on September 22. Bond yields fall as prices rise.

European indices also declined sharply. Benchmark indices in Germany, France, and Spain each lost more than three per cent.

Possible messy default

Greece has enough money to pay pensions, salaries and bondholders through mid-November, Finance Minister Evangelos Venizelos said Tuesday, as global markets sank on worries that a messy default could bring down European banks and trigger another global recession.

The Athens stock index was down more than six per cent by late afternoon.

The turmoil endangered French-Belgian bank Dexia, whose shares plunged as much as 40 per cent, on worries about its exposure to Greek bonds.

Greece had previously said it would start running out of money in mid-October if it did not get the next €8 billion (US$11 billion) instalment of the €110 billion rescue package it has been relying on since May 2010.

Evangelos Venizelos sought to reassure Greeks and investors that the country can hold on a little longer while its rescue creditors decide whether to give it more loans.

"Until mid-November it is clear there will be no problem," said Venizelos, upon returning from a eurozone finance ministers' meeting in Luxembourg.

The worry is that a messy default by Greece - in which sharp losses are imposed with little warning on bondholders, among which are many European banks - would cause massive losses in the financial sector and trigger a credit crunch.

That could stifle loans to the real economy, cause huge uncertainty and push the world economy into another recession.

Eurozone ministers have indicated that while Greece would get its next batch of loans, that decision would not be made until later this month, after the international debt inspectors in Athens complete their review of Greece's reforms.

Missed targets

The inspectors from the Inter-national Monetary Fund, European Central Bank, and European Commission, collectively known as the troika, had suspended their review for several weeks in September amid concern over delayed implementation of austerity measures and missed targets. They returned to Athens last week, and are continuing negotiations.

Most economists agree Greece is unlikely to be able to get out of its debt hole through austerity measures alone and many have called for private bondholders - among which are many European banks - to take sharper losses than currently planned in the second bailout deal.

The view was reinforced this week by figures in the Greek 2012 budget which showed it had missed its deficit reduction targets for this year. The budget gap is expected to reach 8.5 per cent of GDP, higher than the original target of 7.8 per cent.

This could increase further to reach nine per cent if strikes and civil protests delay the implementation of reforms, Venizelos said.

The argument in favour of letting Greece write off more of its debt was underscored by figures predicting that the Greek government would next year post a budget surplus if it were not for the huge amount of interest it is paying on its existing debt.

Allowing Greece to cut loose some of that debt, for example by imposing 50 per cent losses on private bondholders rather than the 21 per cent currently negotiated so far, would be a crucial step to healing the country's crisis.

Eurozone leaders are now assessing how best to protect European banks and other struggling economies from such a move.