European Stocks Drop as Treasuries Surge on Lehman Bankruptcy
By Adria Cimino and Michael Patterson
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Sept. 15 (Bloomberg) -- European stocks tumbled, led by the biggest slump in banking shares in eight months, after the bankruptcy of Lehman Brothers Holdings Inc. drove investors to the safety of government debt.
HBOS Plc, the U.K.'s biggest mortgage lender, tumbled 16 percent, and UBS AG, the European bank hardest hit by subprime- related losses, sank 14 percent. The Dow Jones Stoxx 600 Banks Index dropped 6.5 percent, the most since January, as all 62 stocks declined. BHP Billiton Ltd. and Total SA followed commodity prices lower.
U.S. Treasuries surged, pushing yields on two-year notes below 2 percent for the first time since April on speculation the Federal Reserve will need to lower interest rates to bolster financial institutions battered by more than $510 billion of credit losses and asset writedowns from the subprime-mortgage market's collapse.
``Investors are in uncharted waters,'' said Tony Dolphin, London-based director of strategy and economics at Henderson Global Investors, which manages about $125 billion. ``In the short-term, this can only mean higher risk premiums and a flight to safety.''
The cost to protect corporate bonds from default surged as Lehman's bankruptcy, the biggest in U.S. history, and the emergency sale of Merrill Lynch & Co. to Bank of America Corp. heightened concern the subprime crisis will cause more bank failures.
The Dow Jones Stoxx 600 Index retreated 3.5 percent to 270.49 at 4:30 p.m. in London for the biggest decline since March 17.
`Mayhem'
The yield on two-year notes dropped 34 basis points, or 0.34 percentage point, to 1.86 percent, according to bond broker BGCantor Market Data. Credit-default swaps rose by a record in Europe. The benchmark index for European options rallied the most since January as investors bought insurance against equity declines.
``It's mayhem,'' said Hans Kunnen, head of investment market research in Sydney at Colonial First State Global Management, which holds about $128 billion of assets. ``If you thought the U.S. economy was slowing, that fear has been amplified, and that has implications for overall global economic activity.''
National benchmark indexes retreated in all 18 western European markets, with the slump in 14 markets surpassing 3 percent. Germany's DAX sank 2.9 percent. France's CAC 40 tumbled 3.7 percent and the U.K.'s FTSE 100 lost 3.3 percent.
To help Wall Street brace for Lehman's bankruptcy, the Fed widened the collateral it accepts for emergency loans to securities firms. A group of 10 banks that includes JPMorgan Chase & Co., Goldman Sachs Group Inc. and Citigroup Inc. separately formed a $70 billion fund to ensure market liquidity.
The steps ``are intended to mitigate the potential risks and disruptions to markets,'' Fed Chairman Ben S. Bernanke said in a statement yesterday in Washington.
Rate Cut
Futures contracts on the Chicago Board of Trade showed a 56 percent chance the Fed will cut its 2 percent target rate for overnight lending between banks by at least a quarter point tomorrow, from zero a week ago.
While a rate cut tomorrow is ``more likely,'' Merrill economists wrote in a note that they cannot rule out a reduction today.
The European Central Bank said it will offer financial institutions as much money as they need and the Swiss central bank offered additional liquidity through its overnight facility. The Bank of England said it will take ``appropriate actions if necessary'' to bolster money markets. China cut interest rates for the first time in six years and allowed most banks to set aside smaller reserves.
HBOS fell 16 percent to 236.5 pence. UBS sank 14 percent to 20.32 Swiss francs, and Societe Generale SA, France's third- largest bank by assets, dropped 9.9 percent to 58.55 euros.
Abandoned Talks
``The drop reflects the concern about the solidity of the whole system,'' said Emmanuel Soupre, a fund manager at Neuflize OBC Asset Management in Paris, which oversees the equivalent of $33 billion. ``What will be the consequences of this bankruptcy on the economy? That's the question and we don't have a solution.''
Lehman, once the fourth-largest U.S. investment bank and the biggest underwriter of mortgage-backed securities, filed for bankruptcy after Barclays Plc and Bank of America abandoned talks to buy the 158-year-old firm. The collapse of Lehman, which listed more than $613 billion of debt, surpasses WorldCom Inc.'s insolvency in 2002 and Drexel Burnham Lambert's failure in 1990.
Bank of America, the biggest U.S. consumer bank, will pay $29 a share for Merrill in stock, 70 percent more than the Sept. 12 closing price.
`Permeated Markets'
``The global credit crisis has permeated through all markets,'' said Jason Teh, who helps manage the equivalent of $5.7 billion at Investors Mutual Ltd. in Sydney. ``The real economy will feel the effects of this because it takes time for the banking system to restore itself.''
Mining and energy companies also declined as industrial metals fell in London on concern the housing slump is hurting demand and oil slid more than $7 to a seven-month low after refineries along the Gulf of Mexico coast escaped major damage from Hurricane Ike.
BHP Billiton Ltd., the world's biggest mining company, sank 3.7 percent to 1,453 pence. Rio Tinto Group, the third-largest, lost 5.4 percent to 4,247 pence.
Total SA, Europe's biggest oil refiner, slid 4.3 percent to 43.73 euros. BP Plc, the region's second-largest energy producer, lost 3 percent to 494.75 pence.
Ciba Holding AG surged 28 percent to 48.68 francs after BASF SE agreed to pay 3.45 billion Swiss francs ($3.1 billion) in cash for the Basel, Switzerland-based company to create the world's biggest maker of additives and dyes used in paper and plastics. BASF slipped 3.9 percent to 36.35 euros.
To contact the reporter on this story: Adria Cimino in Paris at
acimino1@bloomberg.net; Michael Patterson in London at
mpatterson10@bloomberg.net.