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European Banks Fall on Concern Greek Fiscal Woes May Spread

European banking stocks fell to the lowest since January as Greece’s political parties failed to form a coalition government, stoking concern other states won’t implement austerity pledges to combat the region’s debt crisis.

“Stocks are falling because of the political uncertainty in Greece,” said Georg Kanders, an analyst at WestLB AG in Dusseldorf, Germany. “The concern is that if Greece can’t meet its obligations, then governments in other countries may follow.”

Greece’s political deadlock entered a second week as President Karolos Papoulias failed to secure agreement on a unity government and avert new elections with the country heading toward a possible exit from the euro area. Spain’s borrowing costs rose at a bill auction today while an Italian debt sale failed to assuage concern that the escalation of the Greek crisis risks overwhelming its Mediterranean neighbors.

The 43-company Bloomberg Europe Banks and Financial Services Index fell as much 3.5 percent to the lowest since Jan. 9. The index was down 3.2 percent at 3:58 p.m. in Frankfurt. Bank of Ireland led the decline, falling 9.4 percent while Bankia SA (BKIA), a nationalized Spanish lender, tumbled 8.9 percent and KBC Groep NV, Belgium’s biggest bank and insurer by market value, slumped 7 percent.

Greece’s biggest anti-bailout party, Syriza, defied overtures to join the government yesterday, deepening the impasse. Leader Alexis Tsipras won’t attend a meeting called by Papoulias today at 7:30 p.m. Athens time, the party said in an e-mailed statement.

Sovereign Crisis

“The sovereign debt crisis just doesn’t want to go away,” Dirk Becker, a banking analyst with Kepler Capital Markets in Frankfurt, said. “Austerity measures have to be implemented to reduce debt over several years if not decades. Europe has the historic chance to do so with pressure from the markets.”

The Spanish government said May 11 it would require banks to take about 30 billion euros ($38.5 billion) of additional provisions to cover potential losses on 123 billion euros of real estate-linked lending that is still performing. The government’s fourth attempt in three years to clean up the industry comes on top of 53.8 billion euros of charges and capital ordered in February.

Spain said May 10 it would take over Bankia and may inject public funds into the banking group with the most Spanish real estate.

Situation Better

Spain sold 2.9 billion euros of bills, just below its maximum target, and offered the most since December to lure investors as demand eased. Italy auctioned 5.25 billion euros of debt, including its first bond of more than 10 years in seven months, as the Treasury reached the maximum set for the sale amid stronger demand.

“The situation we’re in now is still a lot better than where we were a year ago,” said Becker. “The capital and funding situation of banks is much improved with the ECB’s three-year loans, there is fiscal consolidation going on and an understanding between European governments that this is necessary.”

To contact the reporter on this story: Nicholas Comfort in Frankfurt at ncomfort1@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net

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