European Stocks Drop for Second Week in Three

By Peter Levring - Nov 19, 2011 7:00 AM GMT+0700

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Nov. 18 (Bloomberg) -- Bill Gross, co-chief investment officer at Pacific Investment Management Co., and Laurence Fink, chief executive officer of BlackRock Inc., talk about the European sovereign-debt crisis and Germany's response. They spoke with Bloomberg's Erik Schatzker yesterday at an alumni event hosted by the UCLA Anderson School of Management and Bloomberg Television. Bloomberg Television's special event, "Heavy Hitters: Gross / Fink," airs Monday, Nov. 21, at 10pm Eastern time. (Source: Bloomberg)

European stocks declined for the second week in three as sovereign borrowing costs surged to record levels in the euro area and policy makers disagreed over their response to the spreading debt crisis.

Cable & Wireless Worldwide Plc sank 35 percent after suspending future dividends. Dexia SA (DEXB) and KBC Groep NV (KBC), Belgium’s biggest lenders, slumped more than 20 percent. PSA Peugeot Citroen and Renault SA paced losses on a gauge of the region’s automakers. Voestalpine AG fell the most in more than three months after cutting its earnings outlook.

The benchmark Stoxx Europe 600 Index dropped 3.7 percent this week to 232.17, its lowest close in six weeks, as Italian, Spanish and French bond yields soared, renewing concern that contagion from the debt crisis is infecting more euro members. The European Central Bank was said to have bought government bonds throughout the week offering bouts of respite to equities.

“If rates stay where they are now it’ll trigger a recession in Italy and Spain,” said Morten Kongshaug, chief equity strategist at Danske bank A/S in Copenhagen. More bond- buying would be needed for stocks to stop reacting to every surge in bond yields, he said.

ECB bond purchases failed to stem the spread of the crisis as yields in Italy, the euro-area’s third largest economy, increased for the sixth consecutive week and the extra yield investors demand to hold French, Spanish or Belgian debt instead of benchmark German bunds jumped to the highest since the euro was created.

Lack of Progress

An Oct. 26 agreement to bolster the region’s bailout fund, the European Financial Stability Facility, stalled as Germany and France differed over how tackle the crisis. France called for using the ECB as a crisis backstop, although Germany rejected it. Chancellor Angela Merkel listed using the ECB as lender of last resort, issuing joint euro-area bonds and going in for a “snappy debt cut” as unworkable proposals.

New governments took charge in Greece and Italy, raising optimism that the region’s two most-indebted nations will implement austerity measures. Greek Prime Minister Lucas Papademos won approval for the final 2012 budget designed to regain the confidence of creditors and secure resumption of international financing.

Greece seeks to secure the release of an 8 billion-euro loan under an earlier bailout by the middle of next month. Disbursement was halted by Merkel and French President Nicolas Sarkozy after former Prime Minister George Papandreou announced and abandoned a plan to hold a referendum on the budget cuts imposed by the aid.

Germany’s Debt

Germany’s debt level came into focus when Luxembourg Prime Minister Jean-Claude Juncker called it a “cause for concern” in an interview to the General-Anzeiger newspaper.

“Germany has a higher debt than Spain,” Juncker said. “The only thing is that no one here wants to know about that.”

In Italy, Prime Minister Mario Monti struggled to bring political leaders aboard his new government. He vowed to present multiple structural reforms in one package aimed at reducing the country’s debt burden and spur growth. When Monti was sworn in on Nov. 16, the 10-year bond yield topped the 7 percent threshold that led Greece, Portugal and Ireland to seek European Union aid.

The treasuries of Italy, France and Spain sold debt this week, showing an ability to raise money to run the government in the wake of surging yields. While Italy and France met their fund-raising targets, Spain struggled, selling 11 percent less than its goal in its bond auction.

National benchmark indexes fell in all but two of the 18 western-European markets. France’s CAC 40 slid 4.8 percent, the U.K.’s FTSE 100 dropped 3.3 percent and Germany’s DAX lost 4.2 percent.

Cable & Wireless

Cable & Wireless Worldwide slumped 35 percent for the worst performance on the Stoxx 600 after it suspended future dividend payments as profit and sales declined.

The company said it will withhold dividends to “improve balance sheet strength and to enable investment in the business” and that dividends will only be paid in the future when covered by free cash flow. The provider of telecommunications services to the U.K. police force named Gavin Darby as chief executive officer.

A gauge of lenders on the Stoxx 600 fell 6.4 percent as policy makers debated how much loss bondholders must be asked to take on Greek bonds. BNP Paribas (BNP), France’s largest lender, fell 13 percent. Societe Generale (GLE) dropped 12 percent and Credit Agricole SA (ACA) slid 11 percent.

KBC Groep, Dexia

KBC Groep sank 21 percent after Bank of America Corp. said in a report that Belgium’s largest bank may reduce its dividend.

Dexia fell 24 percent as the three-month cross-currency basis swap, the rate European banks pay to convert euro payments into dollars reached the most expensive level since December 2008.

A gauge of European automakers underperformed all other industry groups in the Stoxx 600, declined 8 percent as car sales dropped and economic confidence in the region fell. Sales in Italy and Spain, the region’s fourth- and fifth-biggest markets, fell 5.5 percent and 6.7 percent respectively.

Peugeot and Renault, France’s biggest carmakers, decreased 9.8 percent each. New car registrations fell 1.4 percent in October to 1.04 million vehicles from 1.06 million units a year earlier, the Brussels-based European Automobile Manufacturers Association said.

Voestalpine fell 15 percent, the biggest weekly drop since August, after the steelmaker cut its profit outlook for the full year, citing a “difficult economic environment.”

Copper traders and analysts were the most bearish in almost two months on mounting concern that Europe’s debt crisis will curb demand in the region that accounts for about 19 percent of global consumption. Vedanta Resources Plc (VED), the largest copper producer in India, lost 13 percent.

To contact the reporter on this story: Peter Levring in Copenhagen at Plevring1@bloomberg.net

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