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Markets swoon, hit by thunderbolt news of a Greek debt referendum (video)

Stock markets in the US and Europe fell Tuesday, stunned by news that Greeks will vote in January on national austerity measures tied to resolving Greece's sovereign debt woes.

By Ron SchererStaff writer / November 1, 2011

Jonathan Corpina, left, works with fellow traders on the floor of the New York Stock Exchange Nov. 1. Worries that a planned Greek referendum could scuttle a plan to resolve Europe's debt crisis rattled markets Tuesday morning. Stocks indexes plunged in the U.S. and Europe.

Richard Drew/AP

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New York

Only last week investors were plowing money into stocks, making October one of the market's strongest months ever. Now they can't sell stocks fast enough.

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As of noon Tuesday, the widely watched Dow Jones Industrial Average had fallen about 300 points, after losing 276 points on Monday. What happened? In a word: Greece.

After Greek Prime Minister George Papandreou announced a January referendum on national austerity measures, US and European stock markets began drawing up scenarios – almost none of them positive.

“If the austerity plan is shot down [by Greek voters], then do the European Union and the IMF [International Monetary Fund] lend Greece any more money?” asks Jay Bryson, an international economist at Wells Fargo Securities in Charlotte, N.C. “If not, then we are looking at a default here.”

“People are saying if Greece votes down the austerity plan, they are out of the eurozone,” says Eric Stein, a vice president of Eaton Vance Management in Boston. “In a best-case scenario, they vote in favor of the plan and resolve the issue. But there is also a big chance of a downside scenario where they vote down the plan and the government of Greece gets no more aid and is forced to restructure its debt or do more politically unpopular things.”

It’s not the prospect for a Greek default that is bothering investors, says Wells Fargo's Mr. Bryson. Greece owes only about €400 billion. “The question is what happens to Spain and Italy,” he says.

Italy owes about €2 trillion in debt and Spain another €1 trillion, he says. Under a worst-case scenario, the two nations default on their debt, causing another global financial crisis, à la Lehman Brothers in 2008. US-based banks have exposure to about $150 billion in debts to Spain and Italy but $1.5 trillion to other banks in France and Germany, which own trillions of dollars of other European sovereign debt.

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