U.S. stock markets fell sharply on Monday after a global sell-off as investors grew increasingly skittish over the prospects of twin debt defaults by Greece and Puerto Rico.
Greece appeared likely to miss a critical debt payment to the International Monetary Fund on Tuesday as negotiations over unlocking additional aid from its European creditors broke down over the weekend. Banks have shut down for the week, and citizens can withdraw only 60 euros ($67) a day from their accounts. Meanwhile, in Puerto Rico, the island’s governor is slated to announce later Monday that it cannot pay back more than $70 billion in debt.
The pair of debt crises exposed a new fragility in the financial system and to many observers came suddenly after a period of tranquility. Initial signs suggested that the fallout from the looming defaults would be contained, though economists and analysts warned they could have more significant ramifications if they spur a wider panic.
President Obama and Treasury Secretary Jack Lew lobbied European and Greek officials over the weekend to urge them to find an agreement that keeps Greece on track to meet its obligations and preserve its place in the euro zone.
“Greece does not pose a major direct risk to our banking system,” White House spokesman Josh Earnest said in a news conference Monday. But, he added, “robust growth and economic stability in Europe is clearly within the U.S. economic interest but also in our national security interest as well.”
Earnest added that the administration is not contemplating “a federal bailout of Puerto Rico,” but it is committed to “working with Puerto Rico and their leaders as they address the serious challenges, serious financial challenges.”
Economists say there is no question that the outlook for Greece and Puerto Rico is grim. Greece is already back in recession, and residents of Puerto Rico are leaving the island in droves. Their economies are small — Greece’s is about the same size as Connecticut’s — but the global financial crisis in 2008 was a lesson in how relatively small pockets of instability can rock the entire world.
At 4 p.m. Eastern time Monday, the Standard & Poor’s 500-stock index had fallen 43.4 points, or 2.09 percent, to 2,058. The Dow Jones Industrial Average fell 350 points, or 1.95 percent, to 17,596. Germany’s Dax dropped 3.6 percent, while the London FTSE index fell 2 percent.
The trouble began overnight in China, which has already been suffering a stock market correction after a historic boom this year. The tech-heavy Shanghai Composite Index fell nearly 140 points, or 3.5 percent, to 4,053. The market is now officially in bear territory.
The debt crisis erupted as Europe was just starting to emerge from a double-dip recession. The 19 countries that have adopted the euro as their currency logged the strongest growth in two years during the first quarter. Particularly encouraging was the healthy showing in fragile countries such as France and Italy. Meanwhile, economists were predicting more rapid growth for the United States amid robust hiring and rapidly falling unemployment.
But the turmoil in Greece and Puerto Rico threatens to undermine that progress. At the very least, it is a sign that the world economy remains vulnerable.
“These things don’t happen when global economies are accelerating,” said Steven Ricchiuto, chief economist at Mizuho Securities. “These things tend to boil over to the surface when global economies are underperforming.”
As Greece neared darkness Monday, creditors and its leaders were poised to keep talking about whether there was any way to pull back from the brink of economic collapse amid anger and recriminations on both sides.
Greece’s European partners and international lenders say further cutbacks are needed to maintain the financial lifeline that has kept the country afloat for years. Greece’s government — elected on its anti-austerity pledges — has stood firm in opposing politically sensitive measures such as further slashing pensions.
The Greek government on Monday shuttered its own stock and bond markets alongside its banks, with plans to reopen them next week.
Greek Prime Minister Alexis Tsipras stunned the world by announcing that he would hold a referendum this Sunday over whether his nation should accept the tough austerity terms of its creditors. He has been campaigning for a “no” vote, and on Monday his leftist Syriza party planned to rally anti-austerity supporters in front of the country’s parliament on Athens’s Syntagma Square.
But many other Greeks believe it is better to accept the cutbacks demanded by Greece’s creditors and remain in the euro zone. A “yes” vote would effectively be a rejection of Tsipras and could set off new elections.
“The decision not to prolong financial aid to Greece is offensive, and it’s a disgrace for Europe in general,” Tsipras said in a brief Sunday evening address broadcast across Greek television networks.
As the crisis gathered steam in Greece, many analysts said there is hope that even the worst outcomes might not spark a contagion. Government leaders and investors have been bracing for the potential of default for weeks and hope to keep any turmoil contained. Greek debt is not widely held, limiting global exposure. The country’s main creditors are the International Monetary Fund, the European Central Bank and other euro-area countries.
In addition, central banks have developed new tools to stimulate weak economies and stabilize financial systems. European Central Bank President Mario Draghi unleashed a massive stimulus program earlier this year and has vowed to do “whatever it takes” to maintain a single currency.
Greece amounts to just 1.8 percent of the euro-area economy, and America’s direct exposure to Athens is limited. Greece accounts for less than 1 percent of all U.S. trade — much of it in vegetables.
“What we’re seeing today — a decline in U.S. stocks, but one that in magnitude does not go beyond the kind of day-to-day movements we’ve seen all year — pretty accurately reflects the way the [European Union] meetings went this past weekend: ending badly, but in a way that was not entirely unexpected,” Peter Ireland, an economics professor at Boston College, said in an e-mail. “These events aren’t enough to derail the ongoing U.S. recovery.”
Until today, markets had been quiet about the potential for Greece to upend the euro. A June survey by Barclays found that only 23 percent of investors expected Greece would leave the euro zone within the next three months. And even if it did, less than 20 percent thought that it would weigh heavily on the market.
Speaking at a news conference this month, Federal Reserve Chair Janet Yellen was cautious about the implications of turmoil in Greece for the United States.
“I do see the potential for disruptions that could affect the European economic outlook and global financial markets,” she said. “To the extent that there are impacts on the euro-area economy or on global financial markets, there would undoubtedly be spillovers to the United States that would affect our outlook as well.”
At 5 p.m. Monday, Puerto Rico’s governor, Alejandro Garcia Padilla was expected to announce that the island cannot pay back more than $70 billion in debt. The island’s debt obligation is four times that of Detroit, which became the largest U.S. city to file for bankruptcy in 2012.
Padilla will seek concessions from creditors, which range from mutual funds in the United States to large hedge funds that have been buying Puerto Rican debt at high interest rates, in an effort to stretch out loan payments and drive down borrowing costs that are hamstringing Puerto Rico’s struggling economy.
On Monday, the governor and Puerto Rico’s government development bank released a report analyzing the island’s finances written by former World Bank chief economist and former deputy director of the International Monetary Fund Anne Krueger and economists Ranjit Teja and Andrew Wolfe.
“The report . . . for the first time acknowledges the true extent of the problem,” Garcia Padilla said in a statement Monday. “We must make difficult decisions to meet the challenges we now know are ahead, and I intend to do everything in my power to lead us through this time.”
A U.S. commonwealth with a population of 3.6 million, Puerto Rico carries more debt per capita than any state in the country. The island has been staggering under the increasing weight of those obligations for years as its economy has tanked, triggering an exodus of island residents to the mainland not seen since the 1950s.
Birnbaum reported from Athens. Michael Fletcher contributed to this report.