Debt Ceiling Debate, U.S. Rating Downgrade, Euro Zone Default Spur Market Turmoil

Jared Wade


December 1, 2011

The good news this summer was that Congress eventually agreed to raise the debt ceiling and ensure that the nation didn't default. The bad news is that stock markets plummeted during the months of partisan infighting and, especially, those final, trying days when it seemed like the world's wealthiest nation might inexplicably opt to not pay its bills. This "self-inflicted crisis" highlighted a year of political uncertainty that often left the business world unsure which way was up.

In fact, on the day the agreement was finalized -- the same day a governmental consumer spending report showed that Americans had cut spending for the first time since 2008 -- the global stock selloff culminated in a symbolic nadir: the S&P 500 fell another 2.6%, officially wiping out all of the gains the market had gradually eeked out so far in 2011.

The rhetoric and political impasse reached such a boiling point that, even after Congress forestalled default, Standard & Poor's downgraded the credit rating of U.S. Treasuries for the first time ever. The revised rating was more embarrassing than substantive, but it marked the moment the markets lost faith in elected officials to govern the economy.

On four straight days from August 8 to 11, the Dow Jones Industrial Index rose or fell more than 400 points. Such volatility was unprecedented. It seemed those trading stocks had no more idea where the economy was headed than did the bull statue outside the exchange. The United States had gone to the brink of the unthinkable and the stock traders were right there alongside the Washington politicians -- acting impetuously and likely in the long-term interests of no one.

Ultimately, the markets in 2011 can be summed up by the horror story that unfolded on Halloween. On the last day of October, a month that had been Wall Street's best in nine years, global derivatives broker MF Global went belly up. The firm was overexposed to depreciating European government bonds and announced a nearly $200 million quarterly loss. Rating agencies cut MF's credit to junk, and it was soon revealed that $700 million came up missing as the company transitioned into bankruptcy protection. The Dow fell 275 points.

With only $40 billion in assets, the failure of MF Global could not be a market-changer; it was merely a symptom of the disease. And a day later, the illness came out of remission.

On November 1, Greek Prime Minister George Papandreou blindsided everyone by calling for a popular referendum on the recently cemented bailout offered by the EU. Global fears that Greece could default were reignited. The Dow plummeted another 300 points.

If the market is supposed to reflect the health of the economy, with its daily ups and downs resembling an EKG reading, the Dow did its job in 2011. The economy is ailing. There has been recovery since it suffered a near-fatal heart attack in 2008. But it has come slowly -- and with so many fits and starts that no doctor could say with certainty that tomorrow won?t bring a setback that erases all progress.

Jared Wade is a freelance writer and a former editor of Risk Management.