Fears over the possibility of a Greek debt default and signs of division among Europe's policymakers over how to deal with the crippling crisis combined Monday to send bank stocks sharply lower.
Senior German politicians have suggested publicly in recent days that an orderly bankruptcy of Greece may be part of a solution to the country's problems. The notion, which has been a taboo so far in Europe's handling of the crisis, has spawned uncertainty in financial markets.
The Stoxx 50 index of blue chip European shares dropped 2 percent with many of the continent's leading financial groups, such as Deutsche Bank and BNP Paribas, down by as much as 11 percent as investors worried over their exposure to potentially bad European debt.
France's Societe Generale, which dropped 10 percent, tried to calm investors with a statement saying its exposure to the euro's more imperiled economies is diminishing — now at 3 billion euros — and that it was accelerating plans to raise over 4 billion euros ($5.4 billion).
"The intensifying sell-off ... reflects heightened investor fear that Greece is on the verge of defaulting, which could plunge the weak global economy back into another Lehman-esque recession," said Lee Hardman, an analyst at the Bank of Tokyo-Mitsubishi UFJ.
In the current febrile market environment, the euro has oscillated wildly. After falling to $1.3495, its lowest level since mid-February, it has rallied to trade 0.4 percent higher on the day at $1.3666.
The euro has slumped since the European Central Bank indicated last Thursday that it won't be raising interest rates again anytime soon — the prospect of higher rates had helped prop up the currency despite the debt woes afflicting many of its members.
The tensions in financial markets were fueled by a suggestion Monday from the general secretary of German Chancellor Angela Merkel's junior coalition partner that Greece could leave the eurozone.
"In the final analysis, one also cannot rule out that Greece either must, or would want to, leave the eurozone," Christian Lindner said in an interview on ZDF television.
Lindner's comments echo those made by his leader and Economy Minister Philipp Roesler that Greece may have to default and reports that the country is looking at how it can protect its banks.
"In case of emergency, the orderly bankruptcy of Greece must be part of that, if the necessary tools are available," Roesler wrote in a guest commentary in Monday's edition of Die Welt newspaper.
Faced with the market volatility, an official in Chancellor Angela Merkel's office sought to downplay the talk of a Greek default or euro exit on Monday.
Merkel's spokesman, Steffen Seibert, said Germany is "confident that Greece will be in a position to continue consistently along the road on which it has embarked" and that the current treaties don't foresee either a voluntary exit or expulsion of any country from the eurozone.
"Our clear aim is to stabilize the eurozone as a whole, in its entirety," Seibert said.
Greece is struggling to convince international creditors that it's doing enough to get a handle on its mountain of debts in order to receive the next batch of money due from a multibillion bailout fund. The European Commission said Monday the country wasn't meeting its budget deficit targets.
At the weekend, the Greek government announced it was imposing a two-year property tax to raise 2 billion euros ($2.8 billion) and plug a budget gap identified by the European Union and the International Monetary Fund.
Markets seem unconvinced that Greece will be able to avoid bankruptcy, especially in light of the latest musings from Germany.
"With German officials seemingly in destructive overdrive, as per all the public talk of preparing for a Greek default and even a Greek euro exit, markets can hardly be blamed for the latest charge for the bunker and tin hats," said Marc Ostwald, market strategist at Monument Securities.
The shock resignation Friday of the ECB's chief economist Juergen Stark helped fuel the turmoil in markets. Though the ECB said his departure was due to "personal reasons," investors think there's more to it than that.
Stark has been skeptical of the bank's purchases of government bonds in the markets. Though the program is designed to prevent the debt crisis from enveloping Italy and Spain in particular, it potentially exposes the ECB to the risk of huge losses on shaky bonds.
The European Central Bank said it bought 14 billion euros ($19 billion) in government bonds last week through its controversial emergency program, up slightly from 13.3 billion euros the week before.
Disagreement over how to handle the debt crisis, which has already led to the bailout of three of the euro's 17 members, has been cited as one of the main reasons why it continues to flare up time and time again.
Though Stark's resignation has been viewed negatively in the markets, some analysts think it may actually act as a catalyst for the ECB to take an even more central role in dealing with the debt crisis, especially with regard to the banking system.
"The immediate fear over the erosion of the ECB's policy integrity hurt the euro, but investors may choose to take a different view if the ECB does take a material turn to the dovish side in the immediate future, which is considered rather essential right now to guarantee financial stability," said Chris Walker, a UBS analyst.
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