European shares fall

European shares fell on Monday after banks were hit by a Greek credit rating downgrade, with further weakness seen for financials as investors price in a greater likelihood that Greece will restructure its debt. Banks fell on the back of concerns about potential losses for private bondholders in the event of debt restructuring, with the STOXX Europe 600 banking index down 1.3 percent.
Within the sector, Barclays shed 1.3 percent. The British bank and peer HSBC will take a combined hit of more than $2 billion after giving up a fight to avoid compensating people wrongly sold loan insurance. HSBC lost 0.5 percent, also pressured after reporting a 14 percent fall in first-quarter profit. S&P downgraded Greece's long-term credit rating to B from BB-minus and said a principle reduction of 50 percent or more on Greek debt may be needed as the country struggles with a 327 billion euro debt mountain.
Adding to the heightened jitters, ratings agency Moody's placed Greece's ratings on review for a possible downgrade after markets closed. The pan-European FTSEurofirst 300 index of top shares ended 0.4 percent lower at 1,140.23 points. Analysts said attention was turning to other highly indebted peripheral eurozone countries which may struggle to finance their debt, with selling pressure seen in Spain's IBEX 35 and Italy's FTSE MIB, which underperformed the wider market by falling 2 percent and 1.3 percent respectively.
"Generally, the (economic) growth is insufficient to finance the cost of the burden of the debt for Greece, Ireland and Portugal. If Greece restructures its debt, people will start to ask where next," said Andrea Williams, who manages 1.3 billion pounds assets for Royal London Asset Management.
In further efforts to contain the debt crisis, the European Union has been looking to lower interest rates on bailout loans to Greece and Ireland, and was working on a second rescue for Greece. "It (restructuring) affects certain banks due to the haircuts they will have to take and the cost of funding so the view is that you stick with the Scandinavian and the French which are less exposed," Williams said.
Further falls in the equity market were limited by a positive trend in technical indicators. The FTSEurofirst 300 index stayed above its 50-day moving average line throughout the session, with support for the index seen at 1,133.48. Analysts expected the equity market to trade within a narrow range in the near term. "Broadly, we continue to see a consolidation in May-June, defined as a volatile and rangebound performance around MSCI Europe at 1,200, FTSE 100 at 6,000," J.P. Morgan equity strategists said in a note.
"We remain of the view that the market will make significant new highs in the second half, with the recent commodity sell-off likely to end up as a big positive for second half EM (emerging market) inflation and DM (developed market) growth outlook." Among other movers, MAN rose 1.5 percent after Volkswagen pushed ahead with a plan to combine its MAN and Scania truck-making affiliates by making a cash bid to increase its stake in MAN. Scania jumped 3.7 percent, while Volkswagen fell 2.2 percent.