London/Milan: European bank shares slumped to two-year low, falling more than 3 per cent on Tuesday, as fears mount that Greece is heading for a disorderly default and the debt crisis could spread to Italy.
European bank shares have tumbled over 10 per cent in the last seven trading days as politicians have failed to find a fix for Greece and ahead of a health check on 91 banks due for release on Friday.
Italian banks Unicredit and Intesa Sanpaolo fell by 7 per cent and 5.6 per cent respectively on Tuesday.
Unicredit shares have crashed 30 per cent since their close on July 1 as borrowing costs for Italy have soared on fears about the scale of the country's debt.
"Italy and Spain have been thrown into the mix and they are far bigger in magnitude than Greece, Ireland and Portugal. This could be a true systemic crisis," said Andrew Lim, analyst at Espirito Santo in London. "This is a very real threat and the panic feeds on itself."
As borrowing costs rise, the repayment of debt becomes more costly to maintain and could lead to an economic slowdown and more losses for the banks.
By 0800 GMT the STOXX Europe 600 bank index was down 3.6 per cent at 168.4, its lowest level since May 2009.
BNP Paribas, Deutsche Bank, Lloyds, UBS and Credit Agricole all fell over 4 per cent.
Euro zone finance ministers on Monday promised cheaper loans, longer maturities and a more flexible rescue fund to help Greece and other EU debtors in a bid to stop financial contagion engulfing Italy and Spain, but there are fears the rescue effort is unraveling. They will continue their meeting on Tuesday.
"They could have taken care of this a year ago, a month ago or a week ago. They didn't and now it's spreading to other markets," said Oon-Marc Valahu, a fund manager at Geneva-based firm ClairInvest.
The market fall could continue as long as uncertainty remained over how Europe's politicians would deal with the debt crisis, he said. "The market hates instability and you can't stop the market from going down on fear."
The Institute of International Finance, which is leading talks on a private sector contribution to Greece's rescue, wants the EU to pledge to buy back debt to provide a longer term solution to Greece's mountain of debt, rather than just a quick fix.
The release of the result of a stress test on European banks is another worry. It could show holes in the capital position of some banks and analysts said another fear is that a weak test could fail to restore confidence.
"We've got the solvency tests being released on Friday, which is why everyone's a bit nervous. The market is short the banks, which has been an easy trade," said Andrew King, head of equities at BNP Paribas Asset Management, which has 551 billion euros in assets under management.
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