European stocks slumped as France’s three largest banks dropped as much as 13 percent, U.S. equity futures declined and the euro weakened amid speculation Germany is preparing for default by Greece. Treasuries and bunds rose. The MSCI All-Country World Index headed for a bear market as the Stoxx Europe 600 Index retreated 2.8 percent at 7:19 a.m. in New York. The euro depreciated as much as 2 percent to a 10- year low against the yen, and the Dollar Index climbed to its highest since February. The Treasury yield dropped below 1.88 percent, while the extra yield investors demand to hold Greek 10-year bonds instead of German bunds rose to the highest since the euro was introduced in 1999. The Standard & Poor’s GSCI index of 24 commodities declined for a third day. Europe’s recovery is “fragile” and sovereign-debt levels will keep rising through 2012 in the aftermath of the recession, the European Commission said today. Moody’s Investors Service may cut the ratings of BNP Paribas SA, Societe Generale SA and Credit Agricole SA this week because of their Greek holdings, two people with knowledge of the matter said. Officials in Chancellor Angela Merkel’s government are debating how to shore up German banks should Greece fail to meet budget-cutting terms of its aid package, three coalition officials said Sept. 9. “The market is in extreme fear,” Charles Berry, a fixed- income trader at Landesbank Baden-Wuettemberg in Stuttgart, said in an interview. “It’s the problem in the euro area that drove that sentiment.” Bank Declines The MSCI All-Country World Index dropped 1.4 percent, bringing the gauge to within one index point of a 20 percent slide from its high this year. The Stoxx Europe 600 Index fell to its lowest price-earnings ratio on estimated earnings since March 2009. A gauge of bank shares slid 4 percent as BNP Paribas lost 13 percent, Societe Generale slid 8 percent and Credit Agricole plunged 9 percent. AXA SA, Europe’s second-largest insurer, slumped 8.6 percent. Standard & Poor’s 500 Index futures expiring in December slid 1.7 percent, indicating the gauge will extend two days of declines. The S&P 500 wiped out its weekly advance on Sept. 9 after the European Central Bank said Juergen Stark resigned from the executive board, suggesting policy makers are divided over how to fight the debt crisis. ECB President Jean-Claude Trichet is due to hold a press conference today in Basel, Switzerland. Greek Prime Minister George Papandreou, vowing to avoid a default and stay in the euro, approved new measures yesterday to help plug a budget gap as resistance builds in Europe to extending more aid to the region’s most-indebted nation. Default Concern The euro depreciated 0.4 percent to $1.3611, after falling as much as 1.2 percent. The Dollar Index, which tracks the U.S. currency against those of six trading partners, was 0.2 percent higher after rising as much as 0.8 percent. The yen strengthened against all 16 most-traded peers monitored by Bloomberg. “The intensifying sell-off in both the euro and risk assets in general reflects heightened investor fear that Greece is on the verge of defaulting,” Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London, wrote in a report. The yield on the 10-year Treasury fell two basis points to 1.90 percent before the government sells $32 billion of three- year notes, the first of three auctions this week totaling $66 billion. The yield on the German bund, Europe’s benchmark government security, declined to as low as 1.71 percent. The two-year note yield also dropped to a record. Italian Sale The Greek two-year yield surged 523 basis points to a euro- era record of 62.20 percent, while the nation’s 10-year borrowing costs jumped 35 basis points to 20.91 percent, also a record. The Italian 10-year yield rose 7 basis points to 5.48 percent, even as the European Central Bank bought the nation’s government bonds today according to two people with knowledge of the transactions, who asked not to be identified because the deals are confidential. A spokesman for the Frankfurt-based ECB declined to comment. Italy sold 11.5 billion euros of Treasury bills, including 7.5 billion euros of one-year securities at an average yield of 4.153 percent, compared with 2.959 percent at an Aug. 10 auction. Demand was 1.53 times the amount on offer, compared with 1.94 times at the previous sale. The Treasury also sold 4 billion euros of three-month bills. Sovereign Debt Risk European bank and sovereign credit risk rose to records, with the Markit iTraxx SovX Western Europe Index of credit swaps on 15 governments jumping 17 basis points to 353. Contracts on Belgium rose 25 basis points to 307, French swaps increased 12 basis points to 190, Italy’s climbed 40 basis points to 505 and Spain’s were up 44 basis points at 445, according to CMA. “Whatever the Greek scenario, and whatever provisions have to be made, French banks have the means to face it,” Bank of France Governor Christian Noyer said in an e-mailed statement today. “French banks have neither liquidity nor solvency problems.” The Markit iTraxx Financial Index of swaps on 25 banks and insurers rose 9.5 basis points to 309.5, according to JPMorgan Chase & Co. Standard & Poor’s GSCI Index of raw materials retreated 1.6 percent, paced by oil and base metals. Copper for three-month delivery slipped 1.7 percent to $8,672.75 a metric ton on the London Metal Exchange, after earlier today touching $8,650, the lowest price in a month. All six main metals traded on the LME retreated, paced by tin, which dropped as much as 4.7 percent before paring losses to trade 1.5 percent lower. Crude for October delivery fell as much as $2.24, or 2.6 percent, to $85 a barrel in electronic trading on the New York Mercantile Exchange, the lowest since Sept. 6. The MSCI Emerging Markets Index lost 2 percent, heading for its lowest close since Aug. 22. The Budapest Stock Exchange suspended trading in OTP Bank Nyrt. and FHB Bank Nyrt. as the government prepared to unveil a plan that may force lenders to take losses on foreign-currency mortgage loans. Banks led a 4.1 percent decline in the Czech PX Index and a 3.3 percent slump for Poland’s WIG 20. To contact the reporters on this story: Justin Carrigan in London at jcarrigan@bloomberg.net Mark Gilbert in London at magilbert@bloomberg.net To contact the editor responsible for this story: Mark Gilbert in London at magilbert@bloomberg.net

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