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European Stocks Retreat for Second Week on Budget Deficit, Greek Concerns

European stocks fell for a second week as the euro area’s budget deficit widened to more than double the European Union’s 3 percent limit in 2009, led by Greece and Ireland, offsetting better-than-expected results from companies including Ericsson AB and Volvo AB.

Greek banks sank as Moody’s Investors Service cut Greece’s sovereign rating. Royal Bank of Scotland Group Plc rose 16 percent as BofA-Merrill Lynch Global Research added the stock to its “most preferred” list and it may consider a share buyback. Nokia Oyj sank 14 percent as it cut its margin forecast.

The Stoxx Europe 600 Index slipped 0.2 percent to 267.42 this week, a second weekly loss. The VStoxx Index, which gauges the cost of using options to protect against declines in the Dow Jones Euro Stoxx 50 Index, rose to 24.7953 on April 22, reaching the highest level in almost two months.

“Equity markets were very volatile as concerns over Greece swung sentiment and as, eventually, markets forced the Greek government’s hand,” said Neil Dwane, who helps oversee about $80 billion as chief investment officer at Allianz Global Investors’ RCM unit in Frankfurt. “Elsewhere many corporate results were strong. Valuations in Europe remain quite attractive relative to global areas but the euro and Greece do overlay sentiment.”

National benchmark indexes fell in 10 out of the 18 western European markets. Germany’s DAX rose 1.3 percent and France’s CAC 40 slid 0.9 percent, while the U.K.’s FTSE 100 retreated 0.4 percent. Greece’s ASE dropped 6.9 percent.

Budget deficit

The total budget gap for the 16-nation euro region widened to 6.3 percent of gross domestic product last year, the biggest since the introduction of the euro in 1999, from 2 percent in 2008, the European Union’s Luxembourg-based statistics office said on April 22. At 14.3 percent of GDP, Ireland had the largest shortfall, while Greece’s deficit was 13.6 percent, higher than the government’s April 7 forecast of 12.9 percent.

The following day Greece called for activation of a financial lifeline of as much as 45 billion euros ($60 billion) this year in an unprecedented test of the euro’s stability and European political cohesion. The appeal for help from the European Union and International Monetary Fund follows a surge in borrowing costs to what Greek Prime Minister George Papandreou called unsustainable levels that undermine efforts to cut a budget deficit of more than four times the EU limit.

Greek Banks

National Bank of Greece SA declined 13 percent to 11.52 euros. EFG Eurobank Ergasias SA lost 11 percent to 5.63 euros. Moody’s lowered Greece’s rating to A3 from A2, four grades above junk, and put a negative outlook on Greek debt. The ratings company also placed the long-term deposit and debt ratings of six Greek banks on review for possible downgrade.

Credit Suisse Group AG dropped 7 percent to 51.50 francs as quarterly results at Switzerland’s second-biggest bank missed a gain in debt trading that helped lift earnings at rivals.

Royal Bank of Scotland gained 16 percent to 55.80 pence after being added to the “most preferred” stocks among European banks at BofA-Merrill Lynch. Barclays Capital upgraded the stock to “overweight” from “equal weight.”

Britain’s biggest government-owned bank, may use surplus capital to buy back part of the taxpayer’s holding, said two people with knowledge of the situation.

Deutsche Postbank AG climbed 7.1 percent to 26.40 euros on speculation Deutsche Bank AG is preparing a full takeover for the lender it partially owns. Natixis Securities said in a note “the takeover of Deutsche Postbank is only a matter of time” as the “strategic project makes sense and will create value.”

Raiffeisen International Bank

Raiffeisen International Bank Holding AG rose 6.6 percent to 32.28 euros as the Austrian lender that operates in 17 former communist countries said it doesn’t expect a capital increase following a merger with majority shareholder Raiffeisen Zentralbank Oesterreich AG.

Nokia Oyj dropped 14 percent to 9.49 euros after posting a lower-than-estimated quarterly net income. The world’s biggest maker of mobile phones also cut its adjusted margin target for the handset unit to between 11 and 13 percent this year, from 12 to 14 percent earlier. The second-quarter margin could be as low as 9 percent, it said.

Oriflame Cosmetics SA retreated 14 percent to 411 kronor. The Luxembourg-based cosmetics maker said first-quarter pretax profit increased to 43.7 million euros from 27.5 million euros, falling short of the 44.1 million euros analysts had estimated.

Nexans SA sank 9.9 percent to 58.89 euros after reporting a drop in first-quarter sales and predicting a decline in first- half operating margin.

Ericsson, Volvo

Ericsson climbed 14 percent to 88 kronor after reporting first-quarter North American revenue doubled. First-quarter net income at the world’s largest maker of wireless networks slid to 1.26 billion kronor ($180 million) from 1.72 billion kronor a year earlier, missing analyst estimates.

Volvo rose 11 percent to 90 kronor as first-quarter net income beat expectations. Trucks and construction equipment, the two largest divisions that accounted for 81 percent of Volvo’s revenue, both returned to an operating profit.

Taylor Wimpey Plc, the homebuilder that gets 32 of revenue from North America, soared 15 percent to 43.99 pence. Purchases of new homes in the U.S. surged in March by the most in almost five decades as buyers rushed to qualify for a government tax credit and the weather turned milder.

Arkema SA jumped 13 percent to 32.925 euros. Citigroup Inc. upgraded its recommendation for the French chemicals maker to “hold.” The brokerage said it expects Arkema “to have had a strong first quarter, given improved economic demand, boosted by restocking.”

To contact the reporter on this story: Francesca Cinelli in Milan at fcinelli@bloomberg.net.

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