European stocks drop sharply on bank fears

By Polya Lesova, MarketWatch

LONDON (MarketWatch) — Fresh fears about the health of European banks prompted steep declines Thursday for stock markets across the Continent, with Italy and Spain among the worst hit.

The pan-European Stoxx 600 index XX:SXXP +0.06%  dropped 0.9% to end at 247.39.

Banks posted especially steep losses, with the Stoxx 600 Banks index XX:SX7P -0.82%  falling 3.2% to 130.09.

A number of developments contributed to the declines that started Wednesday after Italy’s UniCredit SpA IT:UCG -11.12%  priced a share sale at a 43% discount. Shares of UniCredit slumped 17.3% on Thursday after sinking nearly 15% in the previous session.

Italy’s FTSE MIB index XX:FTSEMIB -0.82%  tumbled 3.7% to 14,767.22, led lower by UniCredit. Other Italian banks also dropped, with Intesa Sanpaolo SpA IT:ISP -4.37%  trading down 7.3% and Banco Popolare IT:BP -2.61%  shedding 10.3%.

“The appetite for buying banks in the peripheral area remains very low,” said Steen Jakobsen, chief economist at Saxo Bank. “The market place is not a buyer of risk. The only buyer of risk is the European Central Bank.”

He added: “We have a system that is clogged up in terms of its [transmission] of credit,” at a time when both European banks and governments need to raise capital.

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Concerns also escalated about Spanish banks after Spain’s economy minister told the Financial Times that they will have to set aside as much as 50 billion euros ($65 billion), which amounts to 4% of Spain’s gross domestic product, in extra provisions on bad property assets.

Spain’s IBEX 35 index XX:IBEX -0.49%  dropped 2.9% to 8,329.60, with Banco Santander SA ES:SAN -1.43%   STD -2.94%  down 4.5% and BBVA SA BBVA -2.62%   ES:BBVA -1.13%  down 5%.

French and German banks also came under pressure, with Societe Generale SA FR:GLE -3.20%  and BNP Paribas SA FR:BNP -1.88%  both shedding 5.4% in Paris and Deutsche Bank AG DE:DBK -5.10%  declining 5.6% in Frankfurt.

The loss for SocGen weighed on the CAC 40 index FR:PX1 -0.24%  , which dropped 1.5% to 3,144.91. Investors digested the results of a French government bond auction that saw a rise in 10-year yields, but fairly respectable demand from investors. Bond auctions are closely watched as the markets try to gauge the ability of euro-zone nations, including France, Spain and Italy, to fund themselves. Concerns remain about France’s ability to retain its prized triple-A credit rating.

In Germany, the DAX 30 index DX:DAX -0.62%  posted relatively modest losses compared to other European markets, falling 0.3% to 6,095.99 after data showed a drop in German retail sales in November. Deutsche Bank was the biggest loser in the DAX, followed by Commerzbank AG DE:CBK -0.65% , which dropped 4.5%.

Shares of HeidelbergCement AG DE:HEI +0.18%  slipped 2.8% after Credit Suisse downgraded its rating to underperform from outperform. And in London, shares of CRH PLC UK:CRH -2.09%  declined 3.4% after the building-materials firm was downgraded to underperform from neutral by Credit Suisse, which also lowered its rating on the building-materials sector to marketweight from overweight, saying valuations remain unjustifiably high.

CRH was one of the biggest losers in the U.K.’s FTSE 100 index UK:UKX +0.45% , which fell 0.8% to 5,624.26.

On the positive side, shares of Petrofac Ltd. UK:PFC +3.35%  rose 1.9% after the oilfield-services firm announced a cooperation agreement with Schlumberger Ltd. SLB -0.46% .

Another top gainer in the FTSE 100 was Eurasian Natural Resources Corp. UK:ENRC +1.37% , up 4.6%. The company said Thursday that it has agreed with First Quantum Minerals Ltd. UK:FQM +0.95%  to settle all claims relating to operations in Congo.

In other trading, shares of Nokia Corp. NOK -2.41%   FI:NOK1V +7.05%  rallied 7.1% in Helsinki after Credit Suisse upgraded the handset maker to outperform from underperform, saying Nokia’s “focus on Windows will allow for the company to drive a recovery in 2012.”

Separately, Finnish newspaper Helsingin Sanomat reported that Nokia’s board plans to propose Risto Siilasmaa as the firm’s new chairman. A Nokia spokesperson declined to comment on the report.

Polya Lesova is chief of MarketWatch’s London bureau.