Euro, bank stocks hit by Greek default fears

By PAN PYLAS | September 12, 2011 | 4:05 AM EDT

LONDON (AP) — Mounting fears over the possibility of an imminent Greek debt default and further signs of division within Europe's policymaking circles over how to deal with the country's crippling debt crisis combined Monday to send the euro down to seven month lows against the dollar and bank stocks plunging.

In Monday morning trading, the euro was down a further 0.3 percent at $1.3573. Earlier it had traded even lower at $1.3495 — its lowest level since the middle of February.

At the start of September, the euro was trading above $1.43 but signals from the European Central Bank that there won't be any more interest rate rises over the coming months have combined with renewed concerns over the financial health of Greece.

Stock markets around the world have also started the week the way they ended last — down. Bank shares were taking the brunt of the selling as investors worry about the potential implications of a Greek default on bank earnings. In Germany, Deutsche Bank and Commerzbank were both down over 7 percent while France's Societe Generale and BNP Paribas slid around 10 percent.

"The intensifying sell-off in both the euro and risk assets in general reflects heightened investor fear that Greece is on the verge of defaulting which could plunge the weak global economy back into another Lehman-esque recession," said Lee Hardman, an analyst at the Bank of Tokyo-Mitsubishi UFJ.

The shock resignation Friday of the ECB's chief economist Juergen Stark sparked the latest bout of turmoil in financial markets. Though the ECB said his departure was due to "personal reasons," investors think there's more to it than that.

Stark has been a consistent skeptic over the bank's purchases of government bonds in the markets. Though the program is designed to prevent the debt crisis from enveloping Italy and Spain in particular, it potentially exposes the ECB to the risk of huge losses on shaky bonds.

Disagreement over how to handle the debt crisis, which has already led to the bailout of three of the euro's 17 members, has been cited as to one of the main reasons why it continues to flare up time and time again.

A suggestion Monday from the general secretary of German Chancellor Angela Merkel's junior coalition partner that Greece could leave the eurozone has added to the tensions.

"In the final analysis, one also cannot rule out that Greece either must, or would want to, leave the eurozone," Christian Lindner said in an interview on ZDF television.

Lindner's comments echo those made Sunday by his leader Philipp Roesler that Greece may have to default and reports that the country is looking at how it can protect its banks.

"With German officials seemingly in destructive overdrive, as per all the public talk of preparing for a Greek default and even a Greek euro exit, markets can hardly be blamed for the latest charge for the bunker and tin hats," said Marc Ostwald, market strategist at Monument Securities.