Mounting fears over the possibility of a Greek debt default and signs of division within Europe’s policymaking circles over how to deal with the crippling crisis combined on Monday to send bank stocks sharply lower.
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.
The Stoxx 50 index of blue chip European shares tumbled 2.4% with many of the continent’s leading financial groups, such as Deutsche Bank and BNP Paribas, down some 10% as investors worried over their exposure to potentially bad European debt.
France’s Société Générale, which dropped 8%, tried to calm investors with a statement saying its exposure to the euro’s more imperilled economies is diminishing — at €3-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.
Leaving the eurozone
The euro also got hammered, falling at one stage on Monday to $1.3495 — its lowest level since the middle of February. Since then, it has stabilised, trading 0.2% higher at $1.3633.
The euro has slumped sharply since the European Central Bank indicated last Thursday that it won’t be raising interest rates again anytime soon — the prospect of higher rates had helped prop up the currency despite the debt woes afflicting many of its members.
The tensions in financial markets were fuelled by a suggestion on Monday 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 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.
Avoiding bankruptcy
Greece is struggling to convince international creditors that it’s doing enough to get a handle on its mountain of debts in order to receive the next batch of money due from a multibillion bailout fund. At the weekend, the government announced it was imposing a two-year property tax to raise €2-billion ($2.8-billion) and plug a budget gap identified by the European Union and the International Monetary Fund.
Markets seem unconvinced that Greece will be able to avoid bankruptcy, especially in light of the latest musings from German policymakers.
“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.
The shock resignation Friday of the ECB’s chief economist Juergen Stark helped fuel the turmoil in markets. Though the ECB said his departure was due to “personal reasons”, investors think there’s more to it than that.
Stark has been a consistent sceptic over the bank’s purchases of 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.
Disagreement over how to handle the debt crisis, which has already led to the bailout of three of the euro’s 17 members, has been cited as to one of the main reasons why it continues to flare up time and time again. — Sapa-AP