London: European shares fell on Wednesday for the third day in succession as US politicians remained in deadlock over raising the debt limit, that could increase the risk of default by the world’s biggest economy.
Euro zone peripheral debt worries also persisted and banks gave back more of last week’s strong gains.
The STOXX Europe 600 Banking Index , with many of its constituents holding euro zone debt, fell 2%. Italy’s Intesa SanPaolo and UniCredit fell 4.7 and 4.1% respectively.
Spain’s Banco Santander SA fell 3.1% after setting aside ¥620 million ($901 million) in provisions to cover compensation for mis-sold payment protection insurance policies in Britain, hurting its first-half profit.
The Thomson Reuters Peripheral Eurozone Banking Index was down 3.1%.
Goldman Sachs downgraded European banks to “neutral” from “overweight” after last week’s bounce, saying doubts over the latest rescue package for Greece have started to emerge after initial optimism.
Bob Parker, senior adviser at Credit Suisse, said the Treasury markets were discounting an agreement on the US debt ceiling but equity markets were discounting a risk the debt ceiling is not renewed, as well as European pressures, such as in Spain and Italy.
“It’s a very difficult situation in the United States, it’s unprecedented,” Parker said.
Deeply divided Republican and Democrat leaders are scrambling to find common ground with less than a week before the government hits its borrowing limit approved by Congress. A downgrade of US credit rating would raise its borrowing costs and hurt economic recovery.
In Europe, Finance Minister Wolfgang Schaeuble said Germany was against a carte blanche for the euro zone’s rescue fund to purchase bonds on the secondary market, highlighting the barriers that still exist to any aggressive action to curb further market turmoil.
“There is a lack of detail post - EU summit, and confusion about private sector writedowns. But Greece has got its money,” said Parker.
Spanish and Italian government bond yields rose.
At 4:53pm, the FTSEurofirst 300 index of top European shares was down 0.5% at 1,095.84 points after falling 0.3% in the previous session. The index is nearer the bottom than the top of the narrow 125-point range in which it has traded in 2011.
French car maker PSA Peugeot Citroen tumbled 8.3% after warning 2011 profits would be hit by the impact of the Japan disaster.
A raft of European companies are reporting second-quarter European earnings this week, but Parker said reporting season has provided “no clear pattern”.
Parker expects equities in northern Europe to end 2011 modestly higher than where they are now, but was less optimistic about southern Europe.
On the upside, Germany’s business software maker SAP rose 2.2% after saying it expects to reach the high end of its 2011 forecasts after a strong second quarter, confounding fears of a slowdown in a fragile European economy.
The Euro STOXX 50 volatility index , one of Europe’s main barometers of sentiment, rose 5.6 Percent, indicating a decline in investors’ desire to buy equities.
Analysts at Standard & Poor’s said they expected volatility to rise.
“Considering the Fukushima earthquake, the Arab spring and the increasing risk of a eurozone or US default, the markets have remained remarkably stable,” Kate Hollis, at S&P Fund Services, said.
“In the meantime, managers are keeping risk levels generally low and focusing on the liquidity of their positions to try and protect capital as much as possible.
“For example, the team running F&C Active Return has been reducing exposure to correlation trades, which have limited liquidity. They have also been executing as many trades as possible via exchange-traded options rather than OTC (over-the-counter) positions and so are increasingly using options on volatility.”