European bank stocks slide as French debt worries mount

European bank shares fell sharply on Wednesday, October 7, as another rise in government bond yields hit lenders. Investors were also worried about France's finances. The STOXX Europe Banks index dropped about 3.5%. Societe Generale Société Générale S.A., Deutsche Bank ↗ 0.15%, UniCredit and Intesa Sanpaolo each lost more than 4%.coinpaper

In Madrid, Spain's IBEX 35 closed down 1.68% at 19,118 points. Banks led the losses there after several days of recovery. CaixaBank fell 3.56%, BBVA Banco Bilbao Vizcaya Argentaria, S.A. ↘ 0.19% dropped 3.5% and Unicaja lost 3.42%. A Reuters video report put the index's fall down to banking stocks, rising debt yields and higher crude prices.reutersconnect+2

Yields and oil push markets lower

Middle East tensions pushed crude above \$101 a barrel, which kept pressure on bond yields, according to Spanish outlet Demócrata. Spain's 10-year yield rose to 4.107% from 4.07% at Tuesday's close. France's 10-year yield moved close to 5%, adding to fears of a new debt crisis.democrata

Other European markets also fell. Milan's FTSE MIB dropped 2.62%, Frankfurt's DAX fell 1.53%, Paris's CAC 40 lost 1.44% and London's FTSE 100 slipped 0.89%. The euro fell 0.68% against the dollar, as investors bought the U.S. currency as a safe haven.democrata

Bank of France Governor Emmanuel Moulin said France's fiscal situation "is complex." He added that the conditions for European Central Bank intervention were not present, because the ECB's job is to contain inflation, "not to solve France's budgetary problems".democrata

Why rising yields hurt lenders

Higher interest rates usually help banks because they can charge more on loans. A fast bond selloff is different. Banks hold large amounts of government debt, and when yields rise, the price of those bonds falls, creating unrealized losses. European lenders hold a lot of debt issued by their own governments, so wider gaps between eurozone countries' yields add more risk. Doubts about a government's finances can lower the value of what its domestic banks own.coinpaper

A volatile start to the quarter

The pressure has been building for weeks. On October 1, the Stoxx Europe 600 closed at its lowest level since June. Bank shares fell 3.7% that day, their biggest drop in seven months, and Britain's 30-year gilt yield reached 6% for the first time since 1998, Bloomberg reported. Reuters reported that the ECB raised rates last month and that traders were pricing in a strong chance of another hike in December.swissinfo+2

"The toxic mixture of pressing bond yields, political uncertainties and high budget deficits is not only hitting bonds but equities as well," one strategist told Bloomberg.swissinfo