Greek default fears slam banking sector

LONDON — 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 $4.1 billion — and that it was accelerating plans to raise over $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 followed talk from members of the junior partner in Chancellor Angela Merkel's coalition — the Free Democratic Party, which is struggling with dismal poll ratings — of a possible Greek bankruptcy or euro exit.

Party leader Philipp Roesler, who is also the economy minister and vice-chancellor, said there should be “no bans on thinking” in resolving the euro crisis — and “I include in that, in perspective, an orderly insolvency if ... the necessary instruments are available.”

Other officials in Chancellor Angela Merkel's center-right government sought to downplay that talk, noting that such instruments aren't available.

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.” He noted that 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.

Finance Minister Wolfgang Schaeuble, a member of Merkel's conservative party, said that markets were reacting to events in an “exaggeratedly nervous” way and it made no sense to feed that nervousness.

“Bans on thinking are one thing, and talking about everything at every point in time is another,” Schaeuble said on ZDF television — though he insisted he was “not giving others advice.” He said the priority was to concentrate on “implementing what we agreed on” with Greece.

Germany's main opposition Social Democrats were blunter, arguing that Roesler appeared more concerned with tackling his own party's problems than those of the eurozone.

Roesler's talk of an “orderly” bankruptcy was irresponsible and the minister had “no idea what he is talking about,” senior lawmaker Hubertus Heil said on n-tv television.

The mixed signals from Germany raised concerns that it 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 $2.8 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.

Stark's resignation has been viewed negatively in the markets, but 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.