Spread of Greek debt crisis hits world markets

Debt is not just a Greek problem anymore.

The fear that the forces behind the Greek debt crisis may also affect other European nations hit global markets in spectacular fashion Thursday.

Stock indexes fell 1.5 percent in London and more than 2 percent in Paris. For a brief moment, the Dow Jones Industrial Average fell nearly 1,000 points before recovering somewhat.

There were reports that the sudden plunge was caused by an errant trade. But that was small comfort to investors. Even after stabilizing, the Dow still finished the day down nearly 350 points, its biggest single-day point drop since the depths of the great recession 15 months ago.

All over the world, there were signs that investors were fleeing the risk of Europe's indebted nations. The euro fell to 14-month lows against the dollar and a whopping 5 percent against the yen.

The volatility index (VIX) of the Chicago Board Options Exchange – a widely watched gauge of market fear – surged 32 percent to close to its highest level in a year.

Although Greece's parliament approved tough austerity measure Thursday, amid large-scale protests, investors feared the country would still default. There was also rising concern that other European nations will be put into a similar situation, having to pass severe austerity measures that would raise taxes and reduce growth.

That could happen in Spain, Italy, even the United Kingdom. 0Japan and the United States also are highly indebted.

"The recovery prospects are dampened" because so many nations are mired in public debt, says Carmen Reinhart, an economist at the University of Maryland and expert on sovereign default. "The advanced economies almost entirely are engulfed in it."

On Thursday, the markets woke up to that fact.