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European Stocks Fall on Banking Sector Worries

CNBC.com
Tuesday, 28 Aug 2007 | 12:00 PM ET

European stocks closed down on Tuesday, as investors sold shares in banks following more bad news from subprime-affected financials and took their cue later in the afteroon from U.S. markets.

U.S. stocks opened lower and continued to fall as investors remained in a defensive mood after a report showing consumer confidence dipped to the lowest level in one year in August.

In Europe the Paris CAC-40and the London FTSE-100 were firmly in negative territory, while the Frankfurt DAX was slightly lower.

In the battered banking sector, shares of Barclays fell 4% as investors tried to determine the level of exposure the London bank had to failed debt vehicles.

A report in the Financial Times claimed Barclays had several hundred million dollars exposure to failed debt vehicles, but Barclays denied it.

Peter Thal Larsen, Banking Editor at Financial Times, told "Power Lunch Europe" that he stood by the story: "That was a very well-sourced story, we had impeccable sources, it was checked and double checked."

Tip of the Iceberg?

He also said comments from investment analysts showed that the amount of exposure mentioned in the story, in the "low few hundreds" of millions of dollars, was not considered to be a problem for Barclays, which has a net profit of about 8 billion pounds ($16 billion).

However some analysts fear that this is just the tip of the iceberg: "We're asking how long is this piece of string, and nobody really knows," Steven Pope of Cantor Fitzgerald Europe told Squawk Box.

Economic news which emerged on Tuesday seemed to make it more difficult for the European Central Bank to take a decision regarding its key interest rate before its September 6 council meeting, leaving the markets guessing.

Analysts had expected the ECB to delay a rate rise until the effects of the market turmoil subside, but strong money supply data, pointing to inflation dangers, and slightly stronger than expected business sentiment in Germany, seem now to make the case for a rate hike in September.

"The ECB is in a very difficult position," Gregor Eder, from Allianz Dresdner, told "European Closing Bell," adding that, "when you look at the current situation in the market," the monetary policy stance should be unchanged.

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