New York: World stocks and the euro sagged yesterday, while gold prices climbed to a new record high, on fears the debt problems in Europe and the United States may spiral into a global crisis.

Stress tests for Eurozone banks released on Friday failed to stem the anxiety about a potential Greek sovereign debt default.

In the US, as the clock ticks towards the August 2 deadline for an increase in the statutory $14.3 trillion borrowing limit, investors were nervous about the stalemate in Washington.

The lack of progress in negotiating a US fiscal package has already led two ratings agencies to warn of a credit rating downgrade in the event of a US default. Such a move, some traders fear, could send interest rates soaring and erode the dollar's reserve currency status.

"There's a perfect storm happening on a global macroeconomic basis with no debt deal here and the ongoing issues in Europe, and the market is looking at all these things and is fairly anxious," said Oliver Pursche, president of Gary Goldberg Financial Services in Suffern, New York.

The Dow Jones industrial average was down 139.68 points, or 1.12 per cent, at 12,340.05. The Standard & Poor's 500 Index was down 14.01 points, or 1.06 per cent at 1,302.13.

The Nasdaq Composite Index was down 32.86 points, or 1.18 per cent, at 2,756.94. European stocks lost more than 1.6 per cent on the day, while the MSCI world equity index fell 1.3 per cent.

"There is still a great concern about the [Eurozone] peripheral debt crisis and in the US we have our own issues with the consensus the US is on downgrade watch," said Michael Woolfolk, senior currency strategist at BNY Mellon in New York. "The yen and the Swiss franc are benefiting as safe havens more than the dollar."

The euro was down 0.6 per cent versus the dollar and the yen at $1.4072 and 111.30 yen, respectively. The safe-haven Swiss franc hit record highs against the dollar and euro.

Spot gold rose to an all-time peak above $1,600 an ounce after rising more than 3 per cent for a second straight week last week, a feat it has not achieved since February 2009.

With fears growing that the debt crisis could spread to Italy or Spain, the Euro-zone's third and fourth largest economies, Spanish 10-year government bond yields rose to 6.36 per cent, their highest since the introduction of the euro. The Italian equivalent also rose above 6.0 per cent.

Europe's debt crisis stoked a mild bid for US government debt, but Washington's stalemate to raise the debt ceiling has limited the appetite for Treasuries.

Confusion reigns ahead of summit

Confusion over competing policy proposals reigned among officials and bankers yesterday as Europe struggled to put together a second bailout of Greece and prevent the region's debt crisis from spreading.

French government spokeswoman Valerie Pecresse said she believed a summit of the Eurozone's 17 national leaders scheduled for Thursday in Brussels would agree on a rescue of Greece, supplementing a ¤110 billion euro bailout launched in May last year.

But after three weeks of preparatory talks, it remained unclear whether government officials and commercial bankers could agree on a way for private owners of Greek government bonds — banks, insurers and other investors — to contribute to the bailout by taking cuts in the face value of their holdings.

The uncertainty pushed the euro down against other currencies yesterday and the government bond yields of indebted Eurozone states rose, with Italy's 10-year yield climbing more than 0.2 percentage point to a euro-era high.

Paul de Grauwe, a professor of international economics at Leuven University in Belgium who has informally advised European Commission President Jose Manuel Barroso, said politicians had delayed taking decisive action on Greece for so long that their options were narrowing fast.

"I'm afraid to hope. I still hope, yes, but I'm not optimistic," he said. "We've had solutions in the past, but we haven't grasped them. Now it's too late for some of those solutions to work anymore; the opportunity has been lost."

Officials are wrestling with a range of schemes for Europe's bailout fund, the European Financial Stability Facility, to finance a voluntary buy-back or swap of Greek debt that would be conducted at a discount to face value, helping to reduce Greece's 340 billion euro debt.

Equities, euro down as gold hits record

  • Fears of a possible US default looming.
  • Clock ticks towards the August 2 deadline for an increase in the statutory $14.3 trillion borrowing limit.
  • The Dow Jones industrial average was down 1.12 per cent, at 12,340.05.
  • The Standard & Poor's 500 Index was down 14.01 points, or 1.06 per cent, at 1,302.13.
  • The Nasdaq Composite Index was down 32.86 points, or 1.18 per cent, at 2,756.94.
  • European stocks lost more than 1.6 per cent on the day, while the MSCI world equity index fell 1.3 per cent.
  • The euro was down 0.6 per cent versus the dollar and the yen at $1.4072 and 111.30 yen, respectively.
  • Spot gold rose to an all-time peak above $1,600 an ounce after rising more than 3 per cent last week.
  • US crude futures were down 2 per cent at $95.27 a barrel.
  • Spanish 10-year government bond yields rose to 6.36 per cent.