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European Stocks Slump as Greek Worries Mount

European bourses are down 2 to 3 percent, as Greece announced it will miss its deficit targets for the year and next. The 2011 deficit is now 8.5 percent of its gross domestic product, while the target set by the troika was 7.6 percent. Next year’s deficit is expected to be 6.8 percent, also missing the target of 6.5 percent. The result of all this austerity? Greece’s economy will shrink 2 percent in 2012.

This highlights the main point of the debate: Everyone believes Greece will restructure its debt. The issue is, does it restructure and stay in the euro, or restructure and get out of the euro.

European banks are down 2 to 4 percent.

Euro zone finance ministers are meeting in Luxembourg tonight.

The main things to keep an eye on:

1. Europe: Now that we are in the final stages of approval of the European Financial Stability Facility (EFSF) expansion (14 of 17 countries have approved), the question is, what's next? Everyone agrees there is not enough money (close to $600 billion) in the EFSF even with the current expansion. Should it be expanded? Leveraged?

2. U.S.: Recession possible, but anemic growth more likely. OK, so we are likely only going to get 1 percent to 2 percent growth this quarter and next, but that's not counting any stimulus. ISI, in a note this morning, puts the odds of a U.S. recession at 45 percent, certainly higher than a couple months ago.

3. China: Slowing, but no hard landing. September manufacturing and service PMI were both up, hardly an indication of a collapse.?

Elsewhere:?

1. First trading day of the quarter; typically volume is a bit higher than usual as new money gets put to work. It often has a positive effect on trading.

But this is not a typical market. The S&P 500, at 1,131, is near the lows of its recent trading range: The closing low was 1,119 on Aug. 8, the intraday low was 1,101. If we we break through this lower range shorts will likely get even more aggressive.

2. Trade sanctions against China? The Senate is moving on legislation that would impose sanctions on China unless it "liberalizes" is currency (read: allows it to rise). This is one of those issues that seems to have common ground between the left and the right; even Paul Krugman endorsed a tougher stance against the Chinese in The New York Times this morning. This is one of those slow-moving, under-the-radar issues to keep an eye on.

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