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Fears of Greek default send European banks tumbling

European bank stocks closed sharply lower on Monday on the back of renewed concerns of a Greek debt default and signs of divisions among Europe's policymakers about how to manage the debt crisis.


AP - Fears of a Greek debt default and signs of division among Europe’s policymakers over how to manage the debt crisis sent bank stocks sharply lower on Monday, raising worries about the sector’s health.

Senior German politicians have suggested publicly in recent days that an orderly bankruptcy of Greece may be part of a solution to the country’s problems. The notion, which has been a taboo so far in Europe’s handling of the crisis, spawned uncertainty in financial markets, in Europe and elsewhere.

The Stoxx 50 index of blue chip European shares dropped 2.6 percent with many of the continent’s leading financial groups, such as Deutsche Bank and BNP Paribas, at one point falling as much as 11 percent on worries over their exposure to potentially bad European debt.

France’s Societe Generale, which closed 10.8 percent lower, tried to calm investors with a statement saying its exposure to the euro’s more imperiled economies is diminishing - now at €3 billion ($4.1 billion) - and that it was accelerating plans to raise over €4 billion ($5.4 billion).

“The intensifying sell-off ... reflects heightened investor fear that Greece is on the verge of defaulting, which could plunge the weak global economy back into another Lehman-esque recession,” said Lee Hardman, an analyst at the Bank of Tokyo-Mitsubishi UFJ.

In the febrile market environment, the euro oscillated wildly. After falling to $1.3495, its lowest level since mid-February, it rallied to trade 0.2 percent higher on the day at $1.3640.

It was as high as $1.43 last week, before Europe’s central bank signaled it won’t be raising rates again soon - higher rates tend to support a currency.

Monday’s flare-up in tensions in financial markets was mainly triggered by suggestions from the general secretary of German Chancellor Angela Merkel’s junior coalition partner that Greece could leave the eurozone.

“In the final analysis, one also cannot rule out that Greece either must, or would want to, leave the eurozone,” Christian Lindner said in an interview on ZDF television.

Lindner’s comments echo those made by his leader and Economy Minister Philipp Roesler that Greece may have to default and reports that the country is looking at how it can protect its banks.

“In case of emergency, the orderly bankruptcy of Greece must be part of that, if the necessary tools are available,” Roesler wrote in a guest commentary in Monday’s edition of Die Welt newspaper.

Faced with the market volatility, Chancellor Angela Merkel’s office sought to downplay such comments.

Merkel’s spokesman, Steffen Seibert, said Germany is “confident that Greece will be in a position to continue consistently along the road on which it has embarked” and that the current treaties don’t foresee either a voluntary exit or expulsion of any country from the eurozone.

“Our clear aim is to stabilize the eurozone as a whole, in its entirety,” Seibert said.

Hubertus Heil, a senior lawmaker with Germany’s opposition Social Democrats, said Roesler’s talk of an “orderly” bankruptcy was irresponsible and the minister had “no idea what he is talking about.”

Heil told n-tv television that his impression was Roesler’s aim was more to address his own party’s crisis - it is struggling with dire poll ratings - than to contribute to stabilizing the eurozone.

The mixed signals from Germany raised concerns that the country may be tiring of shouldering the cost of rescue packages and faces internal pressure to consider more drastic options, such as allowing a default, to solve the crisis.

On Monday, traders bought up insurance against a default on Greece’s government bonds, suggesting they believe a bankruptcy will happen at some point.

“With German officials seemingly in destructive overdrive, as per all the public talk of preparing for a Greek default and even a Greek euro exit, markets can hardly be blamed for the latest charge for the bunker and tin hats,” said Marc Ostwald, market strategist at Monument Securities.

Greece is struggling to convince international creditors that it’s doing enough to cut its mountain of debts to receive the next batch of money due from a multibillion bailout fund. The European Commission said Monday the country wasn’t meeting its budget deficit targets.

To make up for that, the Greek government announced this weekend that it was imposing a two-year property tax to raise €2 billion ($2.8 billion).

The shock resignation Friday of Juergen Stark from the ECB’s decision-making board helped fuel fears that top officials are at odds over how to solve the crisis.

Though the ECB said Stark’s departure was caused by “personal reasons,” analysts think it was due to his opposition to the bank’s plan to buy government bonds in the markets. Though the program is designed to prevent the debt crisis from enveloping Italy and Spain in particular, it potentially exposes the ECB to the risk of huge losses on shaky bonds.

Though Stark’s resignation has been viewed negatively in the markets, some analysts think it may actually act as a catalyst for the ECB to take an even more central role in dealing with the debt crisis, especially with regard to the banking system.

“The immediate fear over the erosion of the ECB’s policy integrity hurt the euro, but investors may choose to take a different view if the ECB does take a material turn to the dovish side in the immediate future, which is considered rather essential right now to guarantee financial stability,” said Chris Walker, a UBS analyst.

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