London: European share prices were flat on Monday and on course to snap a five-session rally after credit rating agency Standard & Poor’s raised fresh concerns over private sector involvement in a second Greek bailout package, hitting banks sharply after a strong rally last week.
S&P said current French plans to roll over Greek debt held by private banks would likely constitute a “selective default”, increasing uncertainty over the structure of a future debt deal and prompting profit-taking among major banking stocks.
The cost of insuring Greek sovereign debt against default rose on the S&P comments, with five-year credit default swaps (CDS) on Greek government debt up 48 basis points at 1,900 bps (19%).
By 1:59pm, the STOXX Europe 600 Banks index was down 0.9%, leading sectoral fallers across the region after a 7.6% gain last week, after Greece backed the austerity cuts needed to secure near-term funds.
European leaders over the weekend released their portion of a 12 billion euros ($17 billion) tranche of funds, with the International Monetary Fund expected to follow suit at a meeting later this week.
“The primary concern with the Greek situation is the rolling (over) of the debt, and how much time we’ve actually bought ourselves in the interim. The comments don’t really help,” said a London-based trader at a U.S. investment bank.
The S&P comments “do puncture some of the enthusiasm that was built up last week”, added Keith Wade, strategist at Schroders.
Among major bank stock movers, French banks Societe Generale , Credit Agricole and BNP Paribas were all down between 1% and 2%.
The Thomson Reuters Peripheral Eurozone Banks index , meanwhile, was down 0.7%.
While the main FTSEurofirst 300 share index remained in a tight range, flat at 1,119.39 points, investor sentiment as measured by the Euro STOXX 50 volatility index rose more than 3% as investor demand for riskier assets fell.
The market ended last week at a one-month closing high, buoyed by US data, while overnight gains in Asia were also acting as support. US markets will remain closed on Monday for the Independence Day holiday.
“It makes the market very light and very thin,” the trader at a US investment bank said. “There will be some reasonable activity between, say, 8 and 1030 and after that volumes will taper off for the rest of the day.”
“This leads to increased volatility, so you could see a wild move coming from nowhere with no real rationale behind it,” he added.
In spite of the subdued opening to the week and the S&P comments, Ian Scott, Global Head of Equity Strategy and Quantitative Research at Nomura, said he remained positive on European equities.
“I think there will eventually be a deal (on Greek debt), even though it may take some time,” said Scott, who has upgraded his stance on continental European shares to “overweight” from “neutral”.
A sector note over the weekend from Nomura said the overall equity risk premium over government bonds in Europe stands at “a lofty 9.5% on our calculations, out of line with realised and implied volatility”.