European Stocks Decline for Third Day on Crisis

By Corinne Gretler - Oct 4, 2011 2:59 PM GMT+0700

European stocks dropped for a third straight day amid waning optimism policy makers will be able to resolve the region’s debt crisis. Asian shares and U.S. index futures retreated.

Dexia SA (DEXB) lost 22 percent after the board asked Belgium’s biggest bank by assets to solve its “structural problems.” Air France-KLM (AF) Group and International Consolidated Airlines Group slid more than 4 percent after the head of the IATA industry association said profit forecasts may be unsustainable.

The benchmark Stoxx Europe 600 Index fell 2.6 percent to 217.89 at 8:57 a.m. in London. The gauge has fallen 24 percent from this year’s peak on Feb. 17 as European and U.S. economic reports trailed forecasts, adding to concern that the global economic recovery is at risk. The decline has left the measure trading at 9.2 times estimated earnings, near the cheapest since March 2009, data compiled by Bloomberg show.

“These concerns over Europe clearly aren’t going away any time soon,” said Cameron Peacock, a market analyst at IG Markets in Melbourne. “As long as markets remain gripped by this fear, the downside pressures are likely to prevail. The lack of consensus we’ve seen so far here really isn’t helping.”

The MSCI Asia Pacific Index dropped 2.3 percent today, while Standard & Poor’s 500 Index futures slid 0.7 percent after the U.S. gauge sank to a one-year low yesterday.

European governments meeting yesterday considered “technical revisions” to a July deal for a second Greek aid package, fueling concern bondholders may have to take bigger losses on the nation’s debt.

July Deal

Finance ministers considered reshaping a July deal that foresaw investors contributing 50 billion euros ($66 billion) to a 159 billion-euro rescue. That private sector involvement, or PSI, includes debt exchanges and rollovers.

“As far as PSI is concerned, we have to take into account that we have experienced changes since the decision we have taken on July 21,” Luxembourg Prime Minister Jean-Claude Juncker told reporters early today after chairing a meeting of euro finance chiefs in Luxembourg. “These are technical revisions we are discussing.”

Goldman Sachs Group Inc. cut its global growth forecast for this year and next, predicting recessions in Germany and France as the European economy stalls and the risk of a contraction in the U.S. grows. The world economy will probably expand 3.8 percent this year and 3.5 percent in 2012, compared with earlier predictions of 3.9 percent for 2011 and 4.2 percent for next year, Goldman Sachs economists Jan Hatzius and Dominic Wilson wrote in an Oct. 3 report.

U.S. Economy

In the U.S., a report today may show factory orders were unchanged in August after rising 2.4 percent the previous month, according to the median forecast of 68 economists in a Bloomberg News survey.

Dexia fell 22 percent to 1.01 euro, the biggest drop in three years. The board asked Chief Executive Officer Pierre Mariani to prepare “necessary measures” to fix the company’s “structural problems” after Europe’s government-debt crisis worsened.

Dexia, BNP Paribas (BNP) SA and Societe Generale SA are resisting pressure from regulators to accept more losses on their holdings of Greek government debt amid criticism they haven’t written down the bonds sufficiently.

While most banks have marked their Hellenic debt to market prices, a decline of as much as 51 percent, France’s two biggest lenders and Belgium’s largest cut the value of some holdings by 21 percent. The practice, which doesn’t violate accounting rules, may leave them vulnerable to bigger impairments in the event of a default. The three firms would have about 3 billion euros of additional losses if they took writedowns of 50 percent, according to data compiled by Bloomberg.

BNP, SocGen

BNP Paribas slid 6 percent to 26.93 euros and Societe Generale (GLE) retreated 6.4 percent to 17.76 euros.

Air France declined 5.5 percent to 5.02 euros and IAG declined 4.3 percent to 147.8 pence. Tony Tyler, chief executive officer of the International Air Transport Association since July 1, said profits forecast to total $28 billion in the three years through 2012 may be unsustainable as over-capacity and looming regulatory costs weigh on margins.

Airlines will generate net income equal to 0.8 percent of revenue next year, a margin that may shrink further if economic growth slows to less than 2.4 percent, Tyler said in an interview in London.

American Airlines parent AMR Corp. tumbled 33 percent in New York yesterday, the most since March 2003, amid growing concern the third-largest U.S. carrier may be forced to seek bankruptcy protection.

UBS Declines

UBS AG (UBSN) slipped 2.1 percent to 9.88 Swiss francs after Switzerland’s biggest bank said it expects a “modest” net income in the third quarter and positive net new money in its wealth management units. UBS said last month it may be unprofitable in the quarter after discovering losses from unauthorized trading at its investment bank.

“The news of third-quarter profit is not as positive as it may appear at first glance because the gains UBS booked have nothing to do with normal business,” said Dirk Becker, a Frankfurt-based analyst at Kepler Capital Markets. “It’s rather disappointing.”

To contact the reporter on this story: Corinne Gretler in Zurich at cgretler1@bloomberg.net

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