Fear of Greek default hurts stock markets here and overseas

LONDON -- Fear that Greece will default on its debt, perhaps triggering a financial chain reaction that will cause another global recession, hurt European stocks Monday and sent American stocks lower for a time.

The market tension came after a German politician suggested Greek finances are so bad the nation might have to leave the coalition of 17 countries that use the euro as their common currency.

In addition, the German economy minister published an op-ed arguing that an "orderly bankruptcy" of Greece must be an option. Greece has been relying on international bailouts to keep it solvent.

Germany's opinion on the Greek crisis is taken seriously because Germany has the strongest economy in Europe. A spokesman for Chancellor Angela Merkel played down both suggestions, but financial markets were spooked anyway.

The Stoxx 50 index of blue-chip European stocks fell 2.6 percent. In the United States, the Dow Jones industrial average was down 167 points, or 1.5 percent, before turning around late in the day to close up almost 70.

Bank stocks were hit hard. In Europe, Deutsche Bank of Germany and BNP Paribas of France were down 11 percent each at one point. Societe Generale, another large French bank, closed down 10.8 percent.

Investors are worried because banks have lent billions of dollars to Greece and other troubled European nations. And American banks have lent money to their European counterparts, so the United States could be hurt if European countries go broke.

In addition, a new recession in Europe would hurt the U.S. because American companies rely on Europe for a big portion of their exports. The American economy is already growing so slowly that it wouldn't take much to push it back into recession.

The stock sell-off "reflects heightened investor fear that Greece is on the verge of defaulting, which could plunge the weak global economy back into another Lehman-esque recession," said Lee Hardman, an analyst at the Bank of Tokyo-Mitsubishi UFJ.

He was referring to the collapse of Lehman Brothers, the American investment bank, in 2008. When it failed, banks tightened lending severely, and panic swept the financial markets.

Kurt Karl, chief U.S. economist at Swiss Re, puts the chances of a chaotic Greek default at only 10 percent.

"European leaders tend to come to a solution before we get to that point," Karl said.

And the U.S. financial system is in better shape than in 2008. Banks have more capital in reserve than they did three years ago. And U.S. money market funds have been steadily cutting back their exposure to European banks.

U.S. Treasury Secretary Timothy Geithner will attend a meeting of European finance ministers Friday in Poland, Treasury officials said. He said last week that Europe had "more work to do" to get the debt crisis under control.

In France, Societe Generale tried to calm investors Monday with a statement saying its exposure to the more troubled economies in Europe was diminishing, down to about 3 billion euros in loans, or $4.1 billion.

It also said it was speeding up plans to raise more than 4 billion euros, or $5.4 billion, to build up its cushion against bad loans.

The euro fell to its lowest point against the U.S. dollar since mid-February, then rallied to finish 0.2 percent higher, at $1.364. It was at $1.43 last week, before the European Central Bank signaled it will not raise interest rates again soon. Higher interest rates tend to help the value of a currency.

Traders bought up insurance Monday against a default on Greece's government bonds, suggesting they believe a bankruptcy will happen at some point.

Greece is trying to convince international lenders that it is doing enough to cut its debt to receive the next batch of money from an international bailout fund. Greece announced a two-year property tax over the weekend.

The European Commission said Monday that Greece was still not meeting its targets. Through August, Greece's budget deficit was 18.1 billion euros, or $24.7 billion. It has already exceeded the full-year target of 17.1 billion euros, or $23.3 billion. Greece says its finances will improve as tax hikes and spending cuts take effect.

On Friday, the surprise resignation of a top official of the European Central Bank fueled fears that leaders are at odds over how to solve the Greek crisis.

Analysts suspected the official, Juergen Stark, left because he opposes the bank's plan to buy government bonds. The program is designed to keep the debt crisis from enveloping Italy and Spain but could expose the bank to losses on the bonds.