The equity markets started off on a sour note Monday, with the Dow Jones Industrial Average dropping more than 140 points before a modest afternoon recovery, as Washington’s debate on whether to raise the debt ceiling and avoid a U.S. default fed investor fears.

This story first appeared in the July 26, 2011 issue of WWD. Subscribe Today.

The Dow closed down 0.7 percent, or 88.36 points, to 12,5923.80, while the S&P Retail Index also fell 0.7 percent, or 3.95 points, to 545.18. Anxious investors sought the safety of gold and pushed the precious metal up as much as $22.80 to an all-time high of $1,624.30 an ounce.

Shares of retailer Francesca’s Holdings Corp., which shot up more than 20 percent following the company’s initial public offering Friday, added 2.4 percent to $28.31 in their second day of trading Monday.

However, decliners far outnumbered advancers in the retail sector, with some of the largest decreases coming from specialty stores. Limited Brands Inc. was off 4.3 percent to $38.45; Pacific Sunwear of California Inc. was down 4.1 percent to $2.79, and The Talbots Inc. finished 3.8 percent lower at $3.01.

Lawmakers have until Aug. 2 to raise the debt ceiling or the U.S. could run out of money to pay its bills, a default that could spark another financial crisis.

Given the severity of the debt crunch in Europe, where Greece is teetering and Italy is thought to be imperiled, investors have largely seen Washington’s wrangling as politics as usual. But as the deadline for default nears — and thousands of government employees start to wonder about their next paycheck — more people are beginning to hash out the practical concerns.

Gary Wassner, co-chief executive officer of factoring firm Hilldun Corp., said factories overseas are already starting to take a tougher line when it comes to giving U.S. companies leeway on how they pay their bills.

“They’re already demanding funds up front,” Wassner said. “I don’t know if they’re going to extend them the kind of credit that they have over the last couple of years.”

Wassner said a default would undermine U.S. credibility and the country’s credit.

Economic forecasting group IHS Global Insight said last week that “worries over the intractable politics of deficit reduction and raising the federal debt ceiling have cast a pall over the economy.” Still, the group predicted that real gross domestic product growth would increase from the “paltry” 1.9 percent annual rate seen in the first half to a 3 percent gain in the second half with help from exports and pent-up demand for cars, housing and business equipment.

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