European Stocks Drop for First Week in Three as Banks Sink on Debt Concern

By Alexis Xydias - Sep 10, 2011 6:00 AM GMT+0700

European stocks fell for the first week in three amid concern policy makers won’t be able to stop the region’s sovereign debt crisis from growing and damaging the economic recovery.

Societe Generale SA and Banco Comercial Portugues SA (BCP) led a measure of European bank shares to the lowest since March 2009. Royal Bank of Scotland Group Plc (RBS) and Barclays Plc (BARC) each sank 13 percent as 17 lenders were sued by the U.S. over the sale of mortgage-backed securities and interbank lending rates climbed.

The Stoxx Europe 600 Index dropped 3.7 percent to 224.59 this past week as 18 of 19 industry groups declined. The gauge has plunged 23 percent since this year’s peak on Feb. 17 as economic data from the U.S. and Europe trailed forecasts and Standard & Poor’s downgraded America’s AAA sovereign-debt rating, citing political failure to reduce record deficits. The index is trading at 9.4 times the estimated earnings of its constituent companies, near the lowest valuation since March 2009, according to data compiled by Bloomberg.

There has been “a whirlwind of sovereign downgrades, collapsing economic data and stumbling politics across developed markets” in recent weeks, said Tim Price, chief investment director at PFP Group LLP in London. “Unsurprisingly, markets have suffered. We have gone from a consensus of muted recovery to one of possible double dip.”

Swiss Stocks Gain

National benchmark indexes fell in all of the 18 western European markets except Switzerland, where the Swiss National Bank intervened to weaken the franc. France’s CAC 40 declined 5.5 percent, the U.K.’s FTSE 100 slid 1.5 percent and Germany’s DAX plunged 6.3 percent. The Swiss Market Index (SMI) gained 1.3 percent, a third straight weekly advance.

The VStoxx Index (V2X), which measures the cost of protecting against a decline in shares on the Euro Stoxx 50 Index, climbed 24 percent, the biggest gain in a month.

The Stoxx 600 tumbled 4.1 percent on Sept. 5 after German Chancellor Angela Merkel’s party suffered its fifth election loss this year as she faced criticism over the handling of the debt crisis.

European Central Bank President Jean-Claude Trichet on Sept. 8 said threats to the euro region have worsened and inflation risks have eased. Planned rescue loans to Greece have been put in doubt as countries including Finland demand the country provide collateral in exchange for the funds.

Default Insurance

The cost of insuring against default on European financial companies rose to a record this week as the ECB comments added to concern lenders are finding it harder to access funding markets. Credit-default swaps on Greek government debt surged to an all-time high, signaling a 91 percent chance the nation will fail to meet debt commitments, after its economy shrank more than previously reported.

The rate at which London-based banks say they can borrow for three months in dollars climbed to the highest level in more than a year yesterday. The London interbank offered rate, or Libor, for dollar loans rose to the highest since August 2010, according to the British Bankers’ Association.

The Stoxx 600 Banks Index dropped 8.4 percent. Societe Generale, France’s second-largest lender, and BCP, Portugal’s second-biggest publicly traded bank by market value, fell 21 percent and 17 percent, respectively.

RBS, Britain’s biggest government-owned lender, and Barclays each fell 13 percent. The banks were among European, Asian and American lenders sued by the U.S. Federal Housing Finance Agency on Sept. 2 to recoup $196 billion spent on mortgage-backed securities bought by Fannie Mae and Freddie Mac.

Porsche Plunges

Porsche SE plunged 15 percent in the week and posted the worst decline in more than two years yesterday after saying efforts to combine with Volkswagen AG by the end of 2011 had failed because of pending lawsuits. Preferred shares of Volkswagen, Europe’s largest automaker, slid 5 percent.

Verbund AG tumbled 16 percent, the most since 2008, after Austria’s biggest power company cut its guidance for 2011 and gave a “cautious” outlook for next year.

YIT Oyj, Finland’s biggest builder, slid 17 percent after saying excessive levels of ammonia were found in residential units it built in St. Petersburg, Russia.

Novartis AG, the drugmaker based in Basel, gained 7.9 percent while Cie. Financiere Richemont SA, the world’s second- biggest luxury-goods company, climbed 6 percent. Investors bought Swiss exporters after the country’s central bank set a ceiling for the franc’s value against the euro. The Swiss currency tumbled 7.3 percent to 1.21 per euro, the biggest weekly drop since the creation of the single currency.

Tullow Oil Plc (TLW) jumped 27 percent, the most since 2008. The U.K. explorer behind West Africa’s biggest offshore discovery in a decade said an offshore find in French Guiana opened up a new hydrocarbon basin on the other side of the Atlantic.

To contact the reporter on this story: Alexis Xydias in London at axydias@bloomberg.net

To contact the editor responsible for this story: Andrew Rummer at arummer@bloomberg.net