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Euro drops to 16-month low over bank concerns

by: - January 5, 2012
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Weaker demand for benchmark French 10-year bonds weighed on bank shares

The euro has dropped to its lowest rate against the dollar in 16 months as concerns continue over the health of Europe’s banks.

The euro fell to $1.2831 against the dollar and was at an 11-year low versus the yen.

Markets were unsettled after France’s cost of borrowing rose and a Spanish minister suggested its banks may face a higher bad loan bill.

Bank stocks dropped, with shares in Italy’s UniCredit at a 19-year low.

Luis de Guindos, Spain’s economy minister, told the Financial Times that its banks may face up to 50bn euros ($64.2bn, £41.3bn) in new bad loans – higher than previous public estimates by the government.

Later on Thursday, Spain will unveil more austerity measures.

French bank stocks fell, with Societe Generale down 4.8% and BNP Paribas down 4.1%.

Germany’s Commerzbank and Deutsche Bank both fell more than 4%.

Spain’s Santander dropped 3.3%. UniCredit fell 10% and its shares were suspended for the second day in a row.

Italy and Spain – both passing painful spending cuts – will have to sell debt in the coming months.

French debt sale

France sold 8bn euros of bonds at an auction, paying an interest rate of 3.29% to borrow for 10 years, up from 3.18% at the last sale in December.

Many investors fear that France is poised to lose its top credit rating, making it more expensive to borrow.

In December, France saw its AAA credit rating placed on negative outlook by rating agency Fitch.

Fitch said the change in outlook was prompted by the heightened risk of government liabilities arising from the eurozone’s debt crisis.

At Thursday’s sale, demand from investors for the benchmark 10-year bonds had fallen.

The bid-to-cover ratio was 1.64, almost half of the 3.05 it was in the December auction.

France introduced an 65bn-euro austerity plan in November.

The gap, or spread, on French bonds compared to comparable debt from Germany – Europe’s largest economy – hit record highs last year.

BBC News