European stocks hit new 2-year lows on fears over Greek default and French banks credit downgrade
City Index September 12, 2011 4:27 PM
<p>European stock indices hit new two-year lows, suffering heavy losses at the start of trading on Monday as investors battened down the hatches on risk […]</p>
European stock indices hit new two-year lows, suffering heavy losses at the start of trading on Monday as investors battened down the hatches on risk with escalating fears that Greece could default and Moody’s could move to downgrade its ratings on a number of French banks imminently. It is the strong move to avert risky assets such as stocks in Europe today that has sent European Indices such as the DAX and to new 29-month lows, whilst the FTSE 100 also suffered.
Potential Greek default threatens
There are continued fears over a potential Greek default in the midst of a disagreement between the EU IMF and Greece over the indebted nation’s attempts to relax the previously agreed deficit target, which was a strict condition within the new bailout terms, as the severe recession in Greece was previously underestimated, making the current targets much difficult to achieve. The disagreement led to the EU and IMF suspending their quarterly review visit to Greece for 10 days whilst Greek PM Papandreou has set out new measures this weekend to help meet deficit targets of €17.1bn this year and combat the expected €2bn shortfall created by the deeper than expected recession. The new measures include a one month cut in wages for all elected officials and an annual charge on all property for two years. The market remains highly sensitive to the progression seen this weekend with €8bn worth of bailout funds and a Greek default at stake should the EU/IMF fail to see validity in the new proposals.
French Banks take a beating – Societe Generale hits 19-year low
Concerns over a potential downgrade from ratings agency Moody’s on their credit ratings for a number of French banks is also hurting sentiment today and convincing many investors to sell their holdings in French banks in particular. Sentiment for French banks was already weak over potential liabilities should Greece default along with existing concerns over Italy and Spain, but it is the fresh uncertainty over a credit downgrade for French banks and rumours about part nationalisation that is causing some violent swings to the downside and impacting broader European trade. Societe Generale shares were hit particularly bad, falling near 10% within the first hour of trading to reach a new 19-year low in the process. Other French banks such as Credit Agricole and BNP Paribas were also badly hit.
ICB reform causes few surprises
Interestingly enough the new proposals submitted by the Independent Commission on Banking ICB today has not caused too much of a negative swing on UK bank prices, whose early losses of around 2% for banks such as Barclays and Lloyds, with RBS gaining small, emphasises that the final ICB report contained no real surprises. Much of the recommended ring fencing of retail banking operations from their investment arms had been long known in the market and the recommended deadline to make these changes, 2019, is also somewhat better than initially feared.
Indeed UK banks sparked a bit of a turnaround in the FTSE 100 trade this morning, with the UK Index starting lower by over 2%, weighed down by Greece and French bank concerns, before investor buying in UK banks from their lows helped to spark a recovery in the FTSE 100, which retraced 1% of its earlier losses by mid morning.
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