Stocks pull back on Europe's deepening debt woes

NEW YORK (AP) - Investors are once again worried that debt problems in Greece and Portugal could threaten the global economic recovery.

Stocks plunged in the U.S. and Europe Tuesday after Standard & Poor's downgraded the debt of the two European countries. The Dow Jones industrial average fell 213 points, its worst loss in almost three months. All the major market indexes were down about 2 percent.

The ratings downgrades also sent the dollar up more than 1.1 percent against the euro, hitting its highest level in about a year. At the same time, gold and Treasury prices also rose as investors sought safer investments. The three often do not trade in the same direction.

"It was a knee-jerk reaction," said Brian Peardon, a wealth adviser at Harrison Financial Group in Citrus Heights, Calif. Peardon said the small size of Greece and Portugal's economies mean their debt struggles are not yet a major problem. But if they were to default on their debt, other countries that hold their bonds would also suffer.

Debt-strapped countries would also likely find it harder to spend more to stimulate their economies and help feed the global economic recovery.

Standard & Poor's downgraded Greece's debt to junk status and lowered Portugal's debt two notches to A-minus from A-plus. Greece has already admitted it can't pay debts coming due shortly and it has asked for a bailout from European neighbors and the International Monetary Fund. And there are growing concerns about Portugal's ability to handle its debts.

Investors have been on edge for months about Greece's fiscal crisis even as they've sent stocks higher on signs of an improving U.S. economy. They have also been worried that Portugal could be the next weak European economy to require help. That has undermined confidence in Europe's shared currency, the euro.

"This is a major test case for the euro," said Quincy Krosby, a market strategist with Prudential Financial. The European Union "needs a viable template on how to deal with these issues," Krosby added, noting that troubles extend beyond just Greece.

Tuesday's downgrades overshadowed the latest series of upbeat earnings reports from U.S. companies including 3M and Dupont.

A setback in the European economic recovery "sends a U.S. recovery back and spreads to emerging markets," said Eric Thorne, an investment adviser at Bryn Mawr Trust Wealth Management in Bryn Mawr, Pa.

The debt problems have the potential "to have devastating effects," Thorne said. Thorne noted, however, he doesn't yet predict a worst-case scenario that would put a global recovery completely on hold.

Greece agreed last week to tap a rescue package from the 15 other countries that use the euro and the International Monetary Fund. However, there are now worries that Greece won't have access to the money before it is forced to make a big debt repayment on May 19.

The downgrades drew some of the market's attention away from testimony by Goldman Sachs CEO Lloyd Blankfein and other top executives from the bank on Capitol Hill. The executives were testifying about the company's dealings in mortgage-backed securities during the credit crisis.

The Securities and Exchange Commission has charged Goldman with civil fraud, accusing it of misleading investors about investments tied to subprime mortgages.

Goldman was actually one of the relatively few winning stocks Tuesday. Analysts said investors were reassured by the fact there were few new details in the testimony. The stock rose $1.01, or 0.7 percent, to $153.04.

According to preliminary calculations, the Dow fell 213.04, or 1.9 percent, to 10,991.99. It was the biggest drop for the average since it fell 268.37 on Feb. 4, also amid concerns about European debt problems.

The Standard & Poor's 500 index fell 28.34, or 2.3 percent, to 1,183.71, while the Nasdaq composite index dropped 51.48, or 2 percent, to 2,471.47.