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 seven-month low against the dollar, although it later recovered some ground.
Europe is not just lurching from one crisis to another. It is lurching into a new one before the previous one is solved, said Makoto Noji, senior strategist at SMBC Nikko Securities.
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 to free up 4 billion euros in fresh capital.
SocGen shares are trading at a historic low of 15.55 euros after losing more than two-thirds in seven months. The bank's market value has shrunk from 110 billion euros in mid-2007 to just 12 billion on Monday -- smaller than spirits group Pernod Ricard or fashion house Christian Dior.
The bank's chief executive, Frederic Oudea, said there were no discussions regarding possible state intervention under way.
Finance Minister Francois Baroin said French banks were solid enough to withstand any crisis in Greece and Bank of France Governor Christian Noyer rushed out a statement saying French banks were not at risk.
There is no crisis for the banks because those that are currently being hit on the markets have all the necessary means to offer solutions, Baroin told reporters, adding that G7 central banks were committed to providing as much liquidity as banks need.
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 markets' 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.
The ECB disclosed that it bought another 14 billion euros in euro zone government bonds last week, the biggest amount for three weeks, under a controversial policy to hold down troubled peripheral countries' borrowing costs.
The central bank now holds a total of 143 billion euros in Italian, Spanish, Greek, Portuguese and Irish bonds under its securities market program, which drove Stark -- a traditional German central banking hawk -- to resign.
Greece resumed suspended talks with international lenders 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. Athens has only a few weeks' cash left.
EU finance ministers are scrambling to settle disputes over a planned second Greek bailout, including a spat over Finnish demands for collateral, in time for a Friday meeting in Poland.
The rescue package has been put in doubt by Greece's repeated missing of fiscal targets agreed with the EU and the International Monetary Fund, plus uncertainty over the scale of private sector participation in a bond swap and debt rollover.
Germany tried to douse the market impact of a string of weekend comments and media leaks suggesting 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 eurosceptic 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 wrote in an article in 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.
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 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.
Greek power workers threatened to sabotage the new property tax announced by the government on Sunday as a last-ditch effort to please foreign creditors, which authorities plan to collect through electricity bills to ensure swift payment.
Trade unionists at power utility PPC said they would obstruct the issuing of bills and order employees not to cut the electricity of customers who refused to pay the tax.
(Additional reporting by Anirban Nag in London, Elena Berton and Jean-Baptiste Vey in Paris, Harry Papachristou in Athens and Brian Rohan in Berlin; Writing by Paul Taylor; Editing by Catherine Evans)