Euro slides amid new debt fears
The euro has fallen to a fresh 15-month low against the dollar while stock markets continued to give up some of their early year gains as European debt concerns offset mounting optimism over the state of the US economy.
For a second day running, the concern in the markets has centred on the state of Europe's banks following UniCredit's announcement on Wednesday that it was selling new shares at a large 69% discount to Tuesday's closing price.
UniCredit is trying to raise 7.5 billion euro (£6.21 billion) to meet new European requirements for banks to strengthen their financial cushions against possible losses. UniCredit's share price was down another 10% on Thursday, following a near 15% decline the day before.
Italy, the recent focus of the debt crisis, must borrow to cover 53 billion euro (£44 billion) in expiring debt in the first quarter alone in debt auctions beginning on January 13. That will test whether the government of new Prime Minister Mario Monti is making progress in regaining market confidence through budget cuts and efforts to improve weak economic growth.
Banks are an integral part of the debt crisis because they hold government bonds. A default or steep fall in the value of government bonds could inflict heavy losses on banks and choke off credit to the European economy.
That is why regulatory authorities want Europe's banks to raise their buffers by 115 billion euro (£95 billion) over the next few months. The worry in the markets is that banks will have to offer sharp discounts. The economic slowdown will also keep pressure on lenders in Europe.
France sold off a large chunk of bonds in a relatively trouble-free manner, though its borrowing rates edged up and demand slipped from earlier auctions. In total, France sold 7.96 billion euro (£6.6 billion) of its bonds at affordable rates.
Of the issues on offer, most interest centred on the 4 billion euro (£3.31 billion) in ten-year notes, for which the results were mixed. It had to pay a rate of 3.29%, up from December's equivalent rate of 3.18%, and demand was lacklustre.
As investors' risk appetite waned, the euro took a battering. Weaker-than-expected eurozone industrial orders in October - up just 1.8% after September's dramatic 7.8% decline - helped send the euro down to 1.2832 dollars, its lowest level since September 2010.
European stocks fell, though most indexes remained higher for the year so far. Germany's DAX was down 0.8% at 6,062 while the CAC-40 fell 1.1% to 3,157. Mainland China's benchmark Shanghai Composite Index fell 1% to 2,148.45, its lowest level in almost three years.