European Stocks Drop for Third Day on Debt; Dexia Sinks, Air France Tumble

By Corinne Gretler - Oct 4, 2011 7:09 PM GMT+0700

European stocks dropped for a third day as policy makers signaled they may renegotiate terms of Greece’s bailout. Asian shares and U.S. index futures fell.

Dexia SA (DEXB) tumbled the most in 2 1/2 years as the board asked Belgium’s biggest bank by assets to solve its “structural problems.” Deutsche Bank AG (DBK) slumped 6.2 percent after abandoning its 2011 earnings forecast. Air France-KLM (AF) Group slid to a 20-year low after the head of the IATA industry association said profit projections may be unsustainable.

The benchmark Stoxx Europe 600 Index fell 3.4 percent to 216.08 at 1:08 p.m. in London, the lowest level in a week. European finance chiefs meeting yesterday considered “technical revisions” to the second Greek bailout, Luxembourg Prime Minister Jean-Claude Juncker said today, fueling concern bondholders may have to take bigger losses on the nation’s debt.

“Any uncertainty or delay is unwelcome, as fear breeds fear and market trends are not easily reverted,” said Emmanuel Hauptmann, senior equity fund manager and partner at Reyl Asset Management SA in Geneva. Ministers considering a higher contribution by private investors to the Greek rescue “creates uncertainty as to how high the bill for European banks in particular may be, explaining the ever-increasing volatility of the sector.”

Economic Reports

The Stoxx 600 has fallen 26 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 9.1 times estimated earnings, near the cheapest since March 2009, data compiled by Bloomberg show.

The MSCI Asia Pacific Index dropped 2.3 percent today, while Standard & Poor’s 500 Index futures fell 1.2 percent after the U.S. gauge retreated to a one-year low yesterday.

Finance ministers meeting yesterday considered reshaping a July rescue deal for Greece that foresaw investors contributing 50 billion euros ($66 billion) to a 159 billion-euro bailout. 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,” Juncker told reporters early today after chairing a meeting of euro finance chiefs in Luxembourg. “These are technical revisions we are discussing.”

‘Knock-On Effects’

“The worse things get in Greece, the more pressure there is to further ‘bail in’ private creditors and the greater the perceived knock-on effects of a Greek default across the rest of the euro zone’s periphery and throughout Europe’s banking system,” Nicholas Spiro, managing director at Spiro Sovereign Strategy in London, wrote in an e-mail. “Sentiment is bearish, euro zone-driven and hyper-sensitive to developments in Greece.”

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.

In the U.S., a release today at 10 a.m. New York time 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 Drops

Dexia plunged 14 percent to 1.12 euros after its 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.

The shares rebounded from a 38 percent drop as the French and Belgian governments pledged to support the bank.

France and Belgium will take “all necessary measures” to protect clients and will guarantee all Dexia’s loans, French Finance Minister Francois Baroin and Belgian Finance Minister Didier Reynders said. Belgium’s cabinet will meet in Brussels tonight to review the options for the lender. Both governments have stakes in the bank following its bailout in 2008.

BNP Paribas (BNP) SA, France’s biggest bank, declined 4.9 percent to 27.27 euros and Societe Generale (GLE) SA retreated 5 percent to 18.02 euros.

Dexia, BNP Paribas and Societe Generale 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.

Hellenic Debt

While most banks have marked their Hellenic debt to market prices, a decline of as much as 51 percent, Dexia, BNP and Societe Generale 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.

Deutsche Bank slumped 6.2 percent to 24.15 euros. Germany’s largest lender dropped its 2011 profit forecast and announced plans to cut 500 jobs as market volatility and unexpected costs on an indirect tax position weighed on third-quarter earnings.

Greece’s Alpha Bank SA and Piraeus Bank SA (TPEIR) fell 9 percent to 1.11 euros and 6.8 percent to 41 euro cents, respectively.

Air France sank 9.5 percent to 4.81 euros, its lowest price since at least December 1991. International Consolidated Airlines Group, the parent of British Airways, declined 5.6 percent to 145.90 pence while European Aeronautic, Defence and Space Co., the maker of Airbus SAS aircraft, slid 6.6 percent to 19.54 euros.

Airline Earnings

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. (AMR) 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.

Volkswagen AG (VOW), Europe’s largest carmaker, lost 6.5 percent to 89.08 euros, leading a gauge of auto-industry shares in the Stoxx 600 to the lowest since May 2010. Renault SA (RNO), France’s second-largest automaker, sank 6.9 percent to 22.66 euros.

Cement Makers Slide

Lafarge SA (LG), the world’s biggest cement maker, dropped 10 percent to 23.56 euros, the most since January 2009, as a gauge European construction companies was the second-worst performer of the 19 industry groups in the Stoxx 600. HeidelbergCement AG (HEI) retreated 8.8 percent to 24.61 euros while Vinci SA (DG) slipped 5.3 percent to 30.11 euros.

Infineon Technologies AG (IFX) dropped 5.7 percent to 5.09 euros. The company may delay investment projects if economic conditions worsen, Frankfurter Allgemeine Zeitung reported, citing an interview with Chief Executive Officer Peter Bauer. The German maker of semiconductors “will not touch” strategic investments, the CEO said, without providing figures.

Arkema SA (AKE) fell 9.1 percent to 38 euros, its lowest price in a year, as the chemical maker was cut to “neutral” from “overweight” at HSBC Holdings Plc.

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;