U.S. investors worry bailout of Spain won't be enough

ByABC News
June 11, 2012, 8:48 PM

— -- Investors who thought it was safe to charge into Spain after its weekend bank bailout are now finding the red cape being yanked away.

Over the weekend, Spain asked for $125 billion in European bailout funds to beef up its banking system. Investors Monday, though, fixated instead on the fact the solution may be inadequate for an intensifying problem.

U.S. stocks paid the price. The Dow Jones industrial average lost 143 points to 12,411.23, snapping what had been a four-session winning streak and a strong start to the week. Now, rather than being reassured that European policymakers are tackling the region's broadening financial crisis, investors returned to worrying Europe's woes could threaten already-shaky global economic growth.

"You can't fix a (home's) 2x4s with plaster. Europe has structural problems," says Jack Ablin of Harris Private Bank. "You can't just plaster over it and think it's solved."

Hand-wringing over Europe and the reaction of government officials is not what markets need right now. The Standard & Poor's 500 is down 7.6% from its recent high, just a week after flirting with a 10% downdraft, the unofficial definition of a correction. Investors are nervously watching events in Spain because they:

•Highlight the broadening nature of Europe's debt problems. What started as worries about Greece have expanded to include Spain and potentially Italy, says Michael Farr of Farr, Miller and Washington. "Solving a problem for a small (nation) like Greece is far different than putting together a rescue for a country the magnitude of Spain or Italy," he says.

•Put fear back into the market. Investors can only retrench now that it's unclear if Europe will fall into a more serious contraction than a routine recession, says Randy Frederick of Charles Schwab. At the very least, U.S. investors can't feel more at ease about Europe until the results of the Greek elections on June 17, he says. The results could determine if Greece stays in the euro, Farr says, threatening to disrupt the construction of one of the world's leading currencies. The CBOE Market Volatility index, a measure of U.S. investors' fear, jumped 10%.

•Strengthen the dollar. The chaos in Europe pushed the euro down 0.3% vs. the dollar. Investors fear a strong dollar could hurt exports, Schwab's Frederick says.

Until investors get more answers, fear takes over. "We can't stop caring about this," Farr says.