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Europe Banks Fall as Portugal Stokes Debt Crisis Concern

July 3 (Bloomberg) -- European financial shares slumped on concern that Portugal’s political turmoil will reignite the sovereign debt crisis and after Standard & Poor’s downgraded several of the region’s banks.

The Bloomberg Europe Banks and Financial Services Index slid as much as 3.1 percent to 87.09 and was down 2.4 percent at 11:19 a.m. in Frankfurt. Portuguese and Spanish lenders led the decline with Banco Comercial Portugues SA, the country’s second-biggest listed bank, falling 15 percent to 7.9 cents and Banco Espirito Santo SA losing 12 percent.

Political instability in Portugal intensified yesterday with the resignation of a second government minister, signaling that the ruling coalition will struggle to implement further budget cuts as its bailout program enters the final 12 months. That sent the country’s 10-year bond yield to 8 percent for the first time since November.

Selling is focused on banks that would face higher financing costs or take losses on Portuguese assets, said Ronny Rehn, an analyst with Keefe, Bruyette & Woods in London.

“Bond yields are going wider on this uncertainty and there’s a jitter in funding markets,” Rehn said by telephone. “There’s a sense that behind closed doors, people are wondering if Greece and other countries are sustainable.”

Banks in Europe also fell after Standard & Poor’s downgraded Deutsche Bank AG, Barclays Plc and Credit Suisse Group AG. New banking regulations and “uncertain market conditions” threatened their business, S&P said yesterday.

Commerzbank AG, Germany’s second-biggest bank, fell 6.7 percent to 5.73 euros. The Frankfurt-based company had 2.9 billion euros ($3.75 billion) of exposure to Portuguese debt and 12.2 billion euros to Spain as of the end of March.

Rehn said KBW reduced its recommendation on European banks to hold from buy two days ago on concern about the sovereign debt crisis.

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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