- Global equities fell sharply from Hong Kong to New York
- Europe's debt forced Dexia into emergency talks on options like an effective break-up
- Eurozone finance ministers indicated they would paper over Greece's budget failure
- This paves the way for the release of €8bn in aid payment for Athens in November
Global equities fell sharply from Hong Kong to New York as Europe's sovereign debt crisis forced Dexia, the Franco-Belgian lender, into emergency talks on options including an effective break-up.
The S&P closed 2.9 per cent lower at 1,099.23, the lowest since September 2010, with US bank shares hit hard by fears on contagion from Europe.
People familiar with the matter said Dexia, which has €20.9bn ($27.6bn) in sovereign debt issued by troubled eurozone countries, held talks to consider quarantining troubled assets in a "bad bank",
"Nothing is off the table," said a senior executive in the Brussels-based group, one of the first European banks to be bailed out in 2008. "There is a call for state guarantees, so nothing can be off the table."
Eurozone finance ministers also gave a clear indication they were preparing to paper over Greece's failure to hit budget targets in 2011, saying that they would set new goals that would combine both this year's and next year's financial numbers.
The decision appeared to pave the way for the release of an essential €8bn aid payment for Athens in November. But senior eurozone officials warned that they were likely to extract new concessions for 2013 and 2014 before signing off on the new money.
Jean-Claude Juncker, the Luxembourg prime minister who heads the group of eurozone finance ministers, also said leaders may be forced to reopen the second €109bn bail-out of Greece. Mr Juncker noted that the economic environment has changed since the deal was struck in July and that "technical revisions" were likely to a complex "haircut" plan for Greek bondholders. Such a move would likely mean bondholders would have to take further writedowns.
Belgium's finance minister, Didier Reynders, said at the meeting: "The French and Belgian governments are behind their banks, whether that is Dexia or another. To help banks and to help, for example, French and Belgian savers, the first thing to do is to help Greece.
But the euro tumbled to its lowest in more than a decade against the yen amid tensions over Greece, which has warned it will run out of cash next week unless it is offered fresh loans. The euro also fell to an eight-month low against the dollar.
Concern spilled into the US and left the S&P, which has now dropped 19.4 per cent from its high for the year, on the cusp of the 20 per cent decline that would mark official "bear market" territory. The bank sector tumbled 4.5 per cent and energy stocks fell 3.3 per cent.
Citigroup and Bank of America fell by more than 9 per cent and credit default swaps -- which provide insurance against a company's collapse -- increased sharply across the sector on worries about US banks' exposure to struggling European financial groups, which is now dominating a list of investor concerns that ranges from mortgage-related losses and litigation to the prospect of a "double-dip" recession in the US.
Banks' failure to get to grips with market sentiment is starting to bear unwelcome similarities with 2008, when executives such as Dick Fuld, the former head of Lehman Brothers, claimed their institutions remained robust nearly up to the moment of collapse
"Certainly, looking at the stocks that are trading at half of tangible book value those are the levels that you didn't see apart from in the depths of the financial crisis," said Moshe Orenbuch, banks analyst at Credit Suisse. "It would imply that that is being driven by something other than a traditional recession fear."
Banks are struggling to contain fears. Morgan Stanley's largest investor, the Japanese banking giant Mitsubishi UFJ Financial Group, issued a statement to say it was "firmly committed to our long-term strategic alliance" after "recent market volatility", which saw the US broker-dealer's shares fall 7.7 per cent on Monday and by almost half in the last three months.
Morgan Stanley chief executive James Gorman sent a company-wide memo on Monday morning, acknowledging "an enormous amount of confusion and misinformation" about the bank as its stock price entered a third week of steep declines.
"In fragile markets, where fear triumphs over common sense, these things are bound to happen," Mr Gorman wrote. "It is easy to respond to the rumour of the day, but that is not usually productive."
The affected companies are preparing to release more detail about their exposure to Europe in earnings announcements in the next two weeks, according to people familiar with the plans.
Over the last few quarters, banks have begun to release some data on their exposure to "peripheral" European nations such as Greece but they are under pressure to give more information on their counterparty exposures to so-called "core" European countries such as France.
The cost of default protection on Morgan Stanley's debt rose to 558bp at the close of the New York session, up 72bp. That equates to $558,000 a year to insure $10m of Morgan Stanley debt for 5 years.
The last time the cost of insuring Morgan Stanley debt hit this level was in October 2008, when Lehman Brothers collapsed.
Bank of America CDS rose 30bp to an all-time wide spread of 446bp, while Citigroup rose 33bp to 348bp.
The market rose briefly after a better-than forecast reading on the manufacturing sector, only to lose steam as bank stocks dropped.
The decline in stocks powered a sharp rally in US government bonds as the Federal Reserve began its first purchase of debt under Operation Twist. The yield on 10-year Treasury notes dropped 16 basis points to 1.75 per cent, near its recent 65 year low of 1.70 per cent.
The dollar rose 1.5 per cent on a trade-weighted basis to its best levels since January. The euro dropped below $1.32 to the dollar for the first time since the start of the year.
Earlier Hong Kong dropped 4.4 per cent amid concern that China's economy may endure a hard landing. The FTSE All-World index dropped 2.7 per cent.
A state guarantee by Belgium and France would be available for Dexia if required, the people familiar with the matter said. A spokesman for Mr Reynders declined to say whether a bad bank would receive such guarantees.
Since the 2008 bail-out, Dexia has been majority owned by the French, Belgian and Luxembourg governments and state-led bodies such as the French CDC. The talks at Dexia came after a heavy sell-off in European bank shares after Greece said it would miss budget deficit targets for this year.
Commerzbank, Germany's number two lender, fell 7.3 per cent, Société Générale dropped 5.2 per cent and BNP Paribas shed 4.6 per cent.
The Dexia board meeting was organised at the close of another day of heavy losses for its shares, which dropped 10 per cent after it was put on a negative downgrade watch by Moody's, the rating agency, which cited concerns about a further deterioration in its liquidity position.