Fears about the euro zone crisis came roaring back after a brief interlude over the holidays, ravaging the euro, bank stocks and sovereign debts.
Banks throughout the region took a drubbing on Thursday in the wake of the decision by UniCredit SpA, Italy's largest lender, to raise capital through a new stock sale at a price of more than 40 per cent below the bank's already depressed market levels. The action prompted a further 17-per-cent plunge in the bank's shares and raised fears throughout the euro zone that many other financial institutions will find it difficult to raise capital.
Meanwhile, yields on French government bonds rose, based on persistent rumours the country is about to lose its coveted triple-A credit rating, while the prices paid to borrow by Spain and Italy also posted sizable increases. Italy's 10-year government bond yield once again surged above 7 per cent, a level many investors view as unsustainable.
The renewed financial turbulence ended a period of relative calm around the New Year's holiday, when stock markets in Europe posted advances and sovereign debt jitters receded. Many market watchers now contend that the European debt crisis is once again worsening, a major negative for the global economy.
"We certainly think it is intensifying," said Jonathan Loynes, chief European economist for Capital Economics, a market research consultancy, in London.
He said that European markets have stabilized at times over the past year, only to enter "periods when they deteriorate again, but the underlying position, as far as we're concerned, has been steadily getting worse."
The shares of other major European lenders followed UniCredit lower. Banco Santander SA, Deutsche Bank AG, BNP Paribas SA and Commerzbank AG all posted losses of more than 4.5 per cent, while the Stoxx Europe bank index fell 3.2 per cent, indicating the decline was widespread across the continent.
Worry over the health of the continent's banks was highlighted earlier this week when the European Central Bank reported that financial institutions parked a record €453.2-billion ($591.3-billion) at its overnight deposit facility on Tuesday. Banks normally would lend money to each other rather than placing funds with the ECB.
Their actions are a sign that many institutions are hoarding cash and lack the confidence to advance money to other lenders, even for short periods. While the amount in the overnight deposit facility declined to €443.7-billion on Wednesday, the level still indicates substantial stress in the banking system.
The euro declined more than 1 per cent against the U.S. dollar on Thursday, to its lowest level since September, 2010, an indication investors are fleeing from Europe to the relative safety of U.S. investments.
Europe's debt crisis roiled world markets throughout 2011, and Mr. Loynes expects it to come to a head later this year, likely with one country abandoning the euro. If such an exit occurs, he believes it will be accompanied by "a pretty deep recession" in the euro zone because a break in the monetary system is unlikely to be orderly.
"It's difficult to see another year in which they just about muddle through so we're thinking this is sort of a crunch year … for the crisis," he said.
Fears that France will suffer a credit downgrade helped fuel investors' anxiety. If France loses its triple-A rating, it will be a sign that problems are spreading from the peripheral countries into the core of the euro zone. France managed a relatively successful bond auction Thursday, but the results were shrugged off.
"The almost daily rumours in respect of France's triple-A rating persist nonetheless and have managed to dampen any real positive sentiment," Brenda Kelly, market analyst for CMC Markets in London, said in a note to clients.