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European stock markets rocked by bank sector plunge

05 september 2011, 19:58
A trader looks at screens at the Madrid bourse September 5, 2011. ©REUTERS/Susana Vera
A trader looks at screens at the Madrid bourse September 5, 2011. ©REUTERS/Susana Vera
European stocks plunged on Monday, with Paris shedding 4.0 percent, as US legal action hit banks and added to pressures from the eurozone debt crisis and recession risks, AFP reports citing traders.

The price of debt bonds issued by Greece and Italy fell sharply, pushing up the borrowing rates indicated by these instruments.

In foreign exchange deals, the euro fell against the dollar as traders withdrew from risky positions on eurozone debt worries. The price of gold jumped back above $1,900 an ounce on demand for a safe haven investment.

The US legal moves are aimed at recouping billions of dollars lost in the financial crisis, while share prices were also weighed down by worries about weak US economic growth following disappointing jobs data.

The head of the European Central Bank Jean-Claude Trichet warned of an immediate and imperative need for enactment of the framework of a second debt rescue for Greece, and for tightened discipline in the management of eurozone economies.

And the head of the International Monetary Fund Christine Lagarde repeated her warning that banks in Europe need extra capital to withstand any contagion from the eurozone debt crisis.

ECB data showed that eurozone banks have deposited record amounts of overnight funds with it, a signal of reluctance by banks to lend to each other.

"The banking sector continues to remain under pressure today as it underperforms across Europe," said Manoj Ladwa, senior trader at ETX Capital.

"The chances of a near-term recovery remain slim as eurozone debt concerns, structural reform and a lawsuit for allegedly mis-selling mortgage debt all weigh heavy on the sector," he added.

In early afternoon trading, the Paris CAC 40 slumped 4.0 percent to 3,022.31 points. London's FTSE 100 index of top shares dropped 2.45 percent to 5,162.54 points and Frankfurt's DAX 30 plunged 3.85 percent to 5,324.14.

Madrid lost 3.63 percent and Milan shed 3.67 percent.

Asian stocks also fell sharply, with the Tokyo market shedding 1.86 percent.

"The US decided to drop a bombshell on the banking sector ahead of their extended weekend by announcing a $200-billion (141-billion-euro) lawsuit across the whole industry for the miss selling of mortgage backed assets, the dreaded subprime loans," said Simon Denham, head of London-based trading group Capital Spreads.

"When the sector is still just about in recovery mode these lawsuits have sent shockwaves through the sector and the overall financial markets sending Europe into a tailspin."

US authorities on Friday sued 17 top US and foreign banks over "billions of dollars" in losses on mortgage-backed securities that plunged in value in the 2008 financial crisis.

The European banking sector was a sea of red on Monday, as Royal Bank of Scotland shares dived 10.39 percent to 22.25 pence, Barclays plummeted 6.6 percent to 154.2 pence, Deutsche Bank plunged 8.92 percent to 23.69 euros and Societe Generale dived 8.84 percent to 20.19 euros.

The Federal Housing Finance Agency alleges that in some cases lenders committed fraud in selling nearly $190 billion in securities to mortgage giants Fannie Mae and Freddie Mac, which had to be bailed out by the US government.

US firms targeted in the suits included Bank of America, Goldman Sachs, Citigroup, JPMorgan Chase, Morgan Stanley, General Electric, Ally Financial and First Horizon.

The foreign banks were Deutsche Bank, HSBC, Credit Suisse, Barclays, Nomura, Royal Bank of Scotland and Societe Generale.

Traders also continued to digest weak US data from late last week.

Only 17,000 private-sector jobs were added in the US economy last month, down from a revised 156,000 in July, official figures showed on Friday.

The Labor Department said the unemployment rate remained unchanged at 9.1 percent from July. The number of unemployed people was essentially unchanged, at 14 million.

The jobs data for August were the worst since September 2010, when the economy shed more than twice the number of jobs it created. The pace of job growth remains far below the numbers needed to reduce the high unemployment rate.

But the dollar rose against the euro on Monday as risk appetite was eroded by renewed worries over Greek debt. The European single currency is seen as a riskier bet compared with the dollar.

The euro dropped to $1.4147 from $1.4205 late in New York on Friday. The dollar edged up to 76.82 yen from 76.80 yen on Friday. US markets were shut on Monday for a public holiday.

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