The crisis was fast evolving from one that centered on the debts of profligate nations into one pivoting on the big banks that hold large amounts of those debts on their balance sheets. Underscoring the threat, France’s three largest banks — which own tens of billions of euros’ worth of bonds issued by Greece — suffered dramatic losses in share value Monday.
Some big European banks are trading at lows not seen since the height of the 2008 financial crisis, with fears growing that bad European government debt could spread through the global financial system in much the same way that bad U.S. subprime mortgages did three years ago. That could lead to another credit crunch.
After the collapse of Lehman Brothers in 2008, “banks stopped lending to each other out of fear,” said Sebastian Dullien, senior policy fellow at the European Council on Foreign Relations. “Something like that could happen again, and there are signs that the money market is freezing again. If there’s a new problem in the banking sector, we could quickly be where we were three years ago.”
In trading Monday, Germany’s DAX index shed 2.2 percent, France’s CAC 40 dropped more than 4 percent and London’s FTSE 100 dropped 1.6 percent. The Dow Jones industrial average was down for much of the day but rallied in the final minutes of trading to close up less than 1 percent.
The rebound extended to Asian markets in early trading Tuesday. Japan’s blue-chip Nikkei 225 index was up 0.3 percent in midday trading.
The European declines occurred in part because of fears that the clock might finally be running out for Greece, whose culture of tax evasion and overspending ignited Europe’s debt crisis.
Frozen out of the lending markets, Greece won a $154 billion bailout last year in the hope of avoiding a massive default with its private creditors. Unable to trim spending enough and raise taxes enough in the midst of a horrific recession, Greece persuaded the European Union, the International Monetary Fund and the European Central Bank this year to grant it a second bailout.
But that rescue still requires approval in the parliaments of all 17 nations that use the euro. And Greece has still not convinced technical officials from its three international lenders that it has a sustainable plan deserving of disbursal of even the loans approved from the first bailout.
Frustration with Greece is growing, particularly in Germany. Philipp Roesler, Germany’s economy minister, broke an unspoken taboo over the weekend by suggesting that Greece’s burdens are so great that it may need to default with its private creditors. His comments hinted at the depth of the revolt against further bailouts within Chancellor Angela Merkel’s ruling coalition at a time when polls are showing that the German public is deeply opposed to further aid.