6 Sep 2011

European stocks drop on recession risks

1:13 pm on 6 September 2011

European stocks tumbled about 4% on Monday, with bank stocks hit particularly hard by acute tension over the risk of recession in leading economies and over eurozone debt.

London's FTSE 100 index of leading companies dropped 3.58%, in Paris, the CAC 40 fell 4.73% and Frankfurt's DAX plunged 5.28% to a two-year low.

Bonds issued by Greece and Italy fell, and the cost of insuring against default by Italy and France, as indicated by the market for credit default swap (CDS) instruments, rose sharply.

The price of gold jumped back above $US1,900 an ounce on demand for a safe haven investment, pulling back to $US1,895 an ounce at the close.

The US markets were closed for the Labor Day holiday. Asian stocks also fell sharply, with the Tokyo market shedding 1.86%.

The head of the European Central Bank Jean-Claude Trichet warned Monday of an immediate and imperative need for enactment of a second debt rescue for Greece, and for tightened discipline in the management of eurozone economies.

He also spoke of an eventual "confederal" disciplined management of eurozone national finances.

The head of the International Monetary Fund, Christine Lagarde, repeated her warning that banks in Europe need extra capital to withstand any contagion from the eurozone debt crisis.

The move against bank stocks was exacerbated by a decision by US authorities to take legal action against 17 leading international banks over trading in securitised mortgage trading at the heart of the 2008 financial crisis.