London: European shares ended sharply down on Wednesday, led by financials, with Societe Generale down more than 22% at one point on rumours about the French bank’s financial solidity, all of which it denied.
The equity market also came under intense pressure earlier in the session on persistent rumours about a downgrade of France’s sovereign AAA rating, though the three major ratings agencies had all confirmed their French sovereign rating.
Societe General ended 14.7% lower after witnessing its biggest one-day percentage drop in more than two decades. Other French banks also saw a steep sell-off, with Credit Agricole down 11.8% and BNP Paribas down 9.5%.
The European bank index fell 6.7%, the biggest one-day fall since March 2009.
“The market is quite jittery, and France seems to be the next one on everyone’s radar,” a trader said. “A downgrade could be possible over the course of months, especially if the situation in the euro zone continues to worsen.”
French banks’ credit default swaps were sharply wider, while the country’s benchmark share index fell 5.5%. The FTSEurofirst 300 index of top European shares ended 4% lower at 910.39 points, the 11th fall in 13 sessions.
In a market already punch drunk on concerns about global growth and debt crises in Europe and the United States, the credit rating rumours flushed out another wave of sellers.
“What we are witnessing here is a fundamental break in the idea that governments can continue to take on ever-larger amounts of debt without markets questioning their ability to repay,” said Klaus Wiener, chief economist at Generali Investments, which manages €330 billion ($469 billion).
“We are running short of triple-A countries. If France is downgraded, that raises issues about other countries as well. Fundamentally, public finances are not very strong.”
Analysts said that for the market to break this negative momentum would require positive economic data confirming that the US economy was not heading back into recession.
Investors were taking refuge in defensive shares, which outperformed the broader stock market. Traders said focus was particularly on those with strong yields.
Investec said some defensive stocks were interesting picks if the current climate persisted at least for the reminder of the summer. It liked Unilever , which handsomely beat first-half forecasts, and British American Tobacco for having potential to improve its profit margins.
Investec said investor appetite for industrials was likely to remain weak as long as economic concerns weighed on the market, but said it continued to prefer British industrial materials group Cookson over Bodycote , primarily on valuation grounds.