The specter of Europe's debt crisis returned Thursday after a brief respite, as bank stocks fell sharply on worries about losses on government debt and a French bond auction drew lackluster demand from investors.
Financial stocks slumped as it became clear banks would have trouble raising billions in new capital in coming months. In Italy, trading in UniCredit shares was halted after they lost a quarter of their value since yesterday morning, when the bank announced it had to offer huge discounts to investors to attract new capital.
The banks need the money to cover potential losses on government debt, whose value has plummeted across most of Europe in recent months on fear of defaults. Many countries in the region have to roll over billions in debt in coming months, putting huge focus on their bond auctions.
France raised euro7.96 billion ($10.31 billion) on Thursday, at the top of its goal, in an auction where demand was solid but far less than at the last sale in December. The borrowing rate for the 10-year bonds, which made up most of the auction amount, rose to 3.29 percent from 3.18 percent last time.
The sale also included 12-year, 24-year and 30-year bonds, and analyst Louise Cooper of BGC Partners said that just the fact that France was auctioning long-term debt indicated its position was fairly solid.
"When countries start to see their funding costs shoot up, then they issue short-term debt as this tends to be cheaper," she said. "Long-term funding is a sign of confidence in a country."
But she added that the demand level was "a little worrying, especially as France has a lot of debt to refinance this year."
The country is under close scrutiny since ratings agencies warned they could strip it of its top AAA grade because of the impact of the crisis and a looming recession on its public finances. A downgrade would likely push France's borrowing costs even higher.
France's banks are burdened with huge amounts of government bonds from weak countries like Greece, and boosting them with state money could be expensive _ and possibly trigger a downgrade for France.
Formerly routine affairs, European government bond auctions have become tense ordeals during the crisis. Countries that cannot raise money at reasonable rates must be rescued with bailout packages, and investors have grown concerned in recent months that even countries in the so-called European "core" could join that ignominious club. Thus far, only the relatively small economies of Greece, Ireland and Portugal have sought bailouts.
At the very least, if countries like France are forced to pay more to borrow money, they may become unwilling _ or unable _ to support their smaller neighbors.
After weeks of watching the bond yields of Italy, France and Spain rise, investors got a small respite this week. Germany and Portugal both sold bonds Wednesday at lower rates than previous auctions.
But France's auction result was not quite as good, while Hungary _ a non-euro member of the EU _ saw its borrowing rates jump higher in a bond sale of its own. The country's tense financial situation has deteriorated in recent weeks, pushing it to accept negotiations for a standby loan from the International Monetary Fund.
The bad news helped weaken sentiment in European markets, pushing the euro to $1.2798, a 15-month low against the dollar.
On the secondary market, where the issued bonds are later traded openly, the yield on 10-year bonds in Italy and Spain _ both considered too big to bail out _ were on the rise. Italy's rose above the psychologically sensitive level of 7 percent, which is considered unsustainable in the longer term.
European financial stocks were hit hard as the debt worries resurfaced. To protect banks against losses on government bonds, European governments are forcing them to keep more safe capital on hand. But raising that money has proved tricky for some, since investors are reluctant to buy their stock or bonds.
Italy's largest bank, UniCredit, announced Wednesday it would offer stock at a 69 percent discount to raise cash _ a disturbing sign of just how pressed banks are.
More bad news came Thursday, when the Financial Times reported that Spain's government thinks its banks will have to raise euro50 billion more than previously thought. That news sent Spanish bank stocks tumbling and contributed to losses in other countries. France's Societe Generale SA was down 5 percent, for example.
The continued volatility in markets is another sign that investors don't put much stock in the "solutions" unveiled at a summit last month that committed governments to a new treaty that would give European bureaucrats substantial oversight of their budgets.
Leaders hoped to reassure markets that overspending would never again threaten state solvency, but investors have noted that it does nothing to solve the immediate crisis _ the heart of which is rising bond yields _ and is unlikely to ever be enacted as strongly as it was conceived anyway.
Instead, they want the European Central Bank step in more forcefully to drive down borrowing costs by buying bonds in the open market, a practice it engages in only modestly right now. Analysts argue that would give governments time to enact longer-term solutions, like restoring credibility in their spending habits and allowing them to invest in growth. For now, governments can only slash spending to woo markets, but that also cripples already anemic growth and threatens to usher in a new recession.
Despite these challenges, French Prime Minister Francois Fillon promised on Thursday that France would invest in growth, by reducing the taxes companies pay on salaries, in the hopes of driving down the unemployment rate, which stands at 9.7 percent ahead of presidential elections this spring.
Fillon said France would cut debt with a new sales tax and by taxing financial transactions.
The latter is controversial since many have argued it will only work if applied across the European Union or even the world. Britain and the U.S. _ both of which are major centers of finance _ have strongly resisted it.
Fillon vowed France would push ahead.
"It's normal that all sectors participate in a collective effort, including the financial sector," he said.