STOCKS FELL TODAY after Europe’s central bank reported that its overnight deposits hit another record – the latest indication of worry among European lenders.
The Dow Jones industrial average lost more than 130 points in midday trading, and the Standard & Poor’s 500 index fell after five days of gains.
The European Central Bank said the continent’s banks parked a record €412 billion with it overnight. That means those banks are less willing to take the risk of making short-term loans to each other, opting instead to earn low interest rates from the ECB. The disclosure also hurt the euro, which fell over 1 percent against the dollar, to $1.29.
The worrying news from the ECB overshadowed two successful auctions of Italian government debt. Italy was able to pay much lower borrowing rates than it did in auctions last month. The strong demand from investors raised hopes that Italy would be able to avoid sinking into a financial crisis, as smaller countries like Greece and Portugal have.
John Merrill, chief investment officer at Tanglewood Wealth Management, said markets would remain vulnerable to flare-ups in Europe’s long-running financial crisis until leaders there come up with more convincing solutions for paying down their enormous debt loads and keeping the 17-nation currency union intact.
“We live in a Band-Aid world,” Merrill said. “Nobody really is addressing underlying issues.”
European leaders agreed at a summit Dec. 9 to forge closer fiscal ties over the long term, but investors are still worried that Greece might default on its debt or be forced to leave the euro bloc. A Greek exit from the currency union would likely cause huge disruptions for the country’s economy and losses for European banks that hold Greek government debt.
Investors fear that could cascade into another global financial panic, as happened in 2008 following the collapse of the U.S. investment bank Lehman Brothers.
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