European banks shaken by Greek debt woe

LONDON (Reuters) - European banks shares extended losses and the cost of insuring their debt reached levels not seen since the height of the crisis in 2009 as Greece’s debt problems revived fears over financial sector stability.

Investors have reacted badly to exposure to Greece bonds and mounting concerns over its economy and the Markit iTraxx senior financial credit default swap index widened to 18 basis points to 195 bps.

European bank stocks have been the worst performing sector this year and fell to a 10-month low, levels last associated with the long volatile aftermath of the collapse Lehman Brothers in September 2008.

French banks have been especially hard hit, Credit Agricole detailed its Greek corporate exposure at 2.4 billion euros ($3.22 billion) and less than 400 million euros for sovereign debt as its stock fell over 5 per cent.

The European bank index was down 0.8 percent at 192 points by 0745 GMT, after falling to low as 187.6, its lowest level since July 2009.

The cost of protecting French banks’ debt rose by 40 basis points -- with Credit Agricole reaching 250 bps. Santander was also hard hit moving 60 bps wider to 290 bps, the same level as Spain.

UK banks have also been affected and UK sovereign CDS moved sharply wider this morning too on expectations of a hung parliament after the election.

Barclays and Royal Bank of Scotland five-year CDS widened by 25 bps and 34 bsp to 175 bps and 230 bps respectively.

Royal Bank of Scotland said its exposure to Greece was modest and manageable, and the main risk it faced was that problems spread to other countries to derail economic growth.

“We have always warned that the world does not spring effortlessly from despair to triumph, and there will be aftershocks,” RBS Chief Executive Stephen Hester told reporters on a conference call after the bank reported a return to profit in the first quarter.

“It’s right that markets have an uncomfortable reminder that it is not plain sailing from here...and we have to live through that volatility until the economic balances around the world have been dealt with,” he said.

($1=.7453 euros)

Reporting by Alex Chambers; Editing by Mike Nesbit