Growing fears of a Greek default sent a hurricane through heavily exposed French banks on Monday and hit the euro as investor confidence in the European currency area's ability to surmount a sovereign debt crisis ebbed.
Shares in Societe Generale, BNP Paribas and Credit Agricole slumped by more than 10 percent amid expectations of an imminent downgrade by credit ratings agency Moody's, due largely to their exposure to Greek bonds.
The shock resignation of European Central Bank chief economist Juergen Stark last Friday, and weekend comments by German politicians suggesting Athens may have to default and be suspended from the euro zone, drove the euro to a 10-year low against the yen and a 7-month low against the dollar.
The storm forced SocGen, the hardest hit French lender in recent weeks, to announce further drastic measures it denied only last week were under consideration, speeding up asset disposals and deepening cost cuts.
SocGen shares are now trading at a historic low of 15.55 euros, after losing more than two-thirds in seven months. Since mid-2007 the bank has seen 52 billion euros ($71.3 bln) wiped off its market value, which today stands at 13.5 billion -- smaller than spirits group Pernod Ricard or fashion house Christian Dior.
The bank's chief executive, Frederic Oudea, said there were no discussions under way regarding possible state intervention in French banks, and Bank of France Governor Christian Noyer rushed out a statement saying French banks were not at risk.
No matter what the Greek scenario, and whatever measures must be passed, French banks have the means to face up to it, Noyer said.
French banks and insurers are not only the biggest foreign holders of Greek government bonds, both directly and through Greek subsidiaries, but also major creditors of Italy, which is increasingly in the market's firing line.
Moody's is also expected to downgrade Italy's Aa2 sovereign rating this week, Richard Kelly, head of European rates and FX research at TD Securities said, noting that both Fitch and Standard & Poor's already had lower ratings for Rome.
It was an ominous start to a high-stakes week for the euro zone.
Greece is due to resume suspended talks with international lenders on Wednesday on a vital 8 billion euro aid installment after announcing a new real estate tax on Sunday to try to plug yet another gap in its 2011 budget deficit.
EU finance ministers are scrambling to settle disputes over a planned second bailout for Athens, including a spat over Finnish demands for collateral, in time for a meeting in Poland on Friday.
That proposed rescue package has been cast in doubt by Greece's repeated missing of fiscal targets agreed with the EU and the International Monetary Fund, as well as by lingering doubts over the scale of private sector participation in a bond swap and debt rollover.
The German government tried to douse down the market impact of a string of weekend comments and media leaks suggesting that Berlin is now assuming that Greece will default and working to ring-fence Athens from the rest of the euro zone.
Vice-Chancellor Philipp Roesler, who is economics minister and leader of Berlin's increasingly Eurosceptical junior coalition party, the Free Democrats (FDP), said there could no longer be any taboos to stabilize the euro.
That includes, if necessary, an orderly bankruptcy of Greece, if the required instruments are available, he was quoted as telling Die Welt newspaper.
However, an economics ministry spokesman said on Monday no such instruments were currently available, and a government spokesman insisted there was strong agreement between Roesler and Chancellor Angela Merkel on the euro zone debt crisis.
We want to stabilize the whole euro zone with all member states, government spokesman Steffen Seibert told a news briefing.
Asked about talk of a suspension or expulsion or voluntary departure of Greece from the euro zone, he said: The legal position anyway stands in the way of such steps.
The European Commission also said it was not working on a scenario of a Greek default.
But Germany's Seibert added that if Athens did not meet its fiscal commitments to the EU, ECB and IMF, that would automatically lead to non-payment of the next tranche of aid.
Greece's deputy finance minister said on Monday the government had cash to operate until next month, highlighting the urgent need for the next emergency loan to stay afloat.
We have definitely maneuvering space within October, Filippos Sachinidis told television channel Mega when asked how much longer the state would be able to pay wages and pensions.
Market analysts and media commentators said the walkout by the top German official at the ECB in protest against the policy of buying the bonds of weak euro zone countries had further sapped confidence in the single currency.
We would suggest that reputational issues created by the loss of Stark, especially coming so soon after (former German Bundesbank president Axel) Weber's departure, will be unhelpful for the euro, Morgan Stanley analysts said in a note.
The European Commission gave a more upbeat forecast for economic growth next year than many private forecasters, rebuffing fears of a recession induced by the U.S. and European debt crises.
The EU executive said the bloc's economy was likely to grow by 1.9 percent in 2012, roughly the same as this year.
The member states facing market pressures must continue to deliver on reaching their fiscal targets and take additional measures if needed, Economic and Monetary Affairs Commissioner Olli Rehn said.
But in an apparent nudge to Germany, he said countries that have fiscal room for maneuver should use spending to support growth and jobs, while sticking to their adjustment path.