Source: NY Times

Financial markets on Wall Street and in Europe were rocked on Tuesday after Greece’s credit rating was cut to junk status by a leading ratings agency, deepening fears that a debt crisis in Europe could spiral out of control.

The ratings agency, Standard & Poor’s, downgraded Greece’s long-term and short-term debt to noninvestment-grade status and cautioned that investors who bought Greek bonds faced dwindling chances of getting their money back if Greece defaulted or went through a debt restructuring. Earlier, S.& P. reduced Portugal’s credit rating and warned that more downgrades were possible.

The downgrades, announced near the end of trading in Europe, overshadowed some positive corporate earnings reports and sent investors running for cover on both sides of the Atlantic.

Investors, worried about shock waves in the broader European economy, migrated away from the euro and pushed the value of the dollar and Treasury bonds higher. The cost of insurance against a Greek default rose sharply.

The major indexes on Wall Street posted some of their sharpest declines in more than a month. The Dow Jones industrial average fell 213.04 points, or 1.9 percent, to 10,991.99. The broader S.& P. 500-stock index fell 28.34 points, or 2.34 percent, to 1,183.71. The Nasdaq composite index lost 51.48 points, or 2.04 percent, to 2,471.47.

In London, the FTSE 100 closed 150.33 points, or 2.61 percent, lower, at 5,603.52. The DAX in Frankfurt lost 172.59 points, or 2.73 percent, closing at 6,159.51. The CAC-40 in Paris fell 152.79, or 3.82 percent, to 3,844.60.

The euro fell more than 1 percent, to $1.3184 from $1.3383 late Monday. Gold prices surged, while the Treasury’s benchmark 10-year note rose nearly a full point to 99 15/32 and its yield fell to 3.69 percent from 3.81 percent late Monday.

Edward Yardeni, president of Yardeni Research, said the downgrade of Greece presented a counterpoint to the scene in Washington, where current and former executives of Goldman Sachs testified before a Senate panel investigating Goldman’s bets on the mortgage market.

The Senate hearing quickly turned into a confrontation as senators from both parties challenged Goldman officials over their aggressive marketing of mortgage-based investments at a time when the housing market was already headed into decline.

An initial panel of four current or former Goldman officials insisted that they had done nothing to mislead their clients. Among them was Fabrice P. Tourre, a vice president at Goldman Sachs who helped create and sell a mortgage investment that figured in a fraud suit filed this month by the Securities and Exchange Commission.

Mr. Tourre, who was named in the S.E.C. lawsuit, defended his role in the sale of the investment. In his opening remarks to the Senate Permanent Subcommittee on Investigations, Mr. Tourre declared: “I deny — categorically — the S.E.C.’s allegation. And I will defend myself in court against this false claim.”

Goldman’s chief executive, Lloyd C. Blankfein, testified after the markets closed.

If the Goldman testimony represented a post-mortem of the recent financial crisis, Mr. Yardeni said, the ratings downgrade offered another signal of what could be the next crisis.

“This is a signal to the markets that the situation is deteriorating rapidly, and it’s not clear who’s in a position to stop the Greeks from going into a default situation,” Mr. Yardeni said. “That creates a spillover effect into Portugal and Spain and raises the whole sovereign debt issue.”

Among companies reporting positive earnings results were 3M, DuPont and United States Steel.

In economic data, the Standard & Poor’s Case-Shiller Home Price Index rose 0.6 percent in February compared with a year earlier. The increase was the first annual gain since December 2006, but the figure did little to help the market as monthly figures showed declines.

Consumer confidence showed a surprising gain. The Conference Board’s index for April rose to 57.9, up from 52.3 in March and above the 53.5 forecast by economists surveyed by Thomson Reuters.