Nov. 1, 2011 at 9:36 AM ET
By msnbc.com news services
A wave of selling hit Wall Street and stock markets around the world Tuesday after Greece’s Prime Minister George Papandreou said he would let the Greek people vote on an unpopular European plan to rescue the nation’s economy.
The Dow Jones industrial average closed the day down 297 points having seen a 321-point deficit at the session’s low. As stocks tumbled, a widely-watched gauge of investor fear, the VIX index, jumped some 25 percent, chalking up its biggest daily gain since mid-August.
U.S. stocks briefly pared their losses after Greek lawmakers dissented from Papandreou’s plan, raising the possibility that Greece’s current government would not last until a confidence vote on Friday. But stocks sank again in afternoon trading after a report said the Greek government believes it will win the confidence vote plans to push ahead with its plan to hold a referendum.
“This was completely unanticipated,” said John Canally investment strategist and economist for LPL Financial in Boston. “This vote in Greece is going to hang over the market for next week or so, unfortunately.”
The prime minister of Greece said unexpectedly Monday that he would put the recently-formulated European rescue plan to a binding vote, the first referendum to be held in Greece since 1974.
The plan requires banks that hold Greek national bonds to accept 50 percent losses to help keep the Greek economy afloat. It also beefs up a European bailout fund and requires banks to strengthen their financial cushions.
International creditors have demanded that Greece enact painful tax increases and drastic cuts in public welfare programs, and Greeks have shown their hostility to those measures in violent protests and strikes.
If the European rescue falls through and Greece defaults on its debt, the ripple effect would be global. Europe could fall into recession, hurting a major market for American exports, and banks could severely restrict lending.
It was only last Thursday that European leaders announced a deal that they believed would be a turning point in the two-year debt crisis. Banks agreed to take bigger losses on Greek debt and to boost their levels of cash, while the European Union increased the size of its bailout fund. Global stock markets surged after the plan was unveiled. Now, those gains seem to be fleeting.
Greece could potentially face bankruptcy if the population ends up voting against the EU’s latest financial aid package in a referendum, the chairman of the Eurogroup countries said.
Jean-Claude Juncker said Tuesday the referendum decision had piled “great nervousness and insecurity” on top of an already highly insecure situation for the euro zone economy, telling RTL Radio:
“I cannot exclude that this would be the case, but it depends on how exactly the question is formulated and on what exactly the Greek people will vote on.” He added: “It is something that brings a great nervousness, that adds great insecurity to already great insecurity and therefore we need to see calmly how we will deal with this.”
Intense selling roiled markets in Europe Tuesday. Italy's main stock index dropped 6.8 percent. France's fell 5.4 percent and Germany's fell 5 percent.
The value of the dollar rose, and bond prices jumped so dramatically that analysts said they were stunned. Analysts also said the bond action reflected fears that the turmoil in Greece would tear at the fabric of Europe's financial system and create a crisis that could engulf the entire European Union, which together forms the world's largest economy.
On Monday, U.S. market sentiment was already turning sour after U.S. brokerage firm MF Global filed for bankruptcy amid reports that it had bought too much bad European debt and fears over the public finances of Italy, the euro zone's third-largest economy.
In Tuesday’s economic news, an industry report showed the pace of growth in the U.S. manufacturing sector unexpectedly slowed in October. As well as monitoring the turn of events in Europe, investors have a raft of economic news to digest this week, culminating in Friday's monthly jobs report.
The Associated Press and Reuters contributed to this report.