Euro slides amid new debt fears

The euro fell to a fresh 15-month low against the dollar today while stock markets continued to give up some of their early-year gains as European debt concerns offset mounting optimism over the state of the US economy.

For a second day running, the concern in the markets has centred on the state of Europe’s banks following UniCredit’s announcement on Wednesday that it was selling new shares at a large 69% discount to Tuesday’s closing price.

UniCredit is trying to raise €7.5bn to meet new European requirements for banks to strengthen their financial cushions against possible losses. UniCredit’s share price was down another 10% today, following a near 15% decline the day before.

Italy, the recent focus of the debt crisis, must borrow to cover €53bn in expiring debt in the first quarter alone in debt auctions beginning on January 13.

That will test whether the government of new Prime Minister Mario Monti is making progress in regaining market confidence through budget cuts and efforts to improve weak economic growth.

Banks are an integral part of the debt crisis because they hold government bonds. A default or steep fall in the value of government bonds could inflict heavy losses on banks and choke off credit to the European economy.

That is why regulatory authorities want Europe’s banks to raise their buffers by €115bn over the next few months. The worry in the markets is that banks will have to offer sharp discounts.

The economic slowdown will also keep pressure on lenders in Europe.

Spain’s economy minister told the Financial Times he expects the country’s banks to have to set aside another €50bn in provisions to cover the costs of bad property loans.

The comments caused Spanish banks stocks to slide and contributed to losses in other countries. France’s Societe Generale SA was down 4%.

France sold off a large chunk of bonds in a relatively troublefree manner, though its borrowing rates edged up and demand slipped from earlier auctions.

In total, France sold €7.96bn of its bonds at affordable rates.

Of the issues on offer, most interest centred on the €4bn in ten-year notes, for which the results were mixed. It had to pay a rate of 3.29%, up from December’s equivalent rate of 3.18%, and demand was lacklustre.

Germany had also seen a drop in demand for its bond issues this week, with demand for €4.06bn of its ten-year bonds issued on Wednesday only barely covering what was on offer.

As investors’ risk appetite waned, the euro took a battering. Weaker than expected eurozone industrial orders in October – up just 1.8% after September’s dramatic 7.8 % decline – helped send the euro down to 1.2832 dollars, its lowest level since September 2010.

European stocks fell, though most indexes remained higher for the year so far. Germany’s DAX was down 0.8 % at 6,062 while the CAC-40 fell 1.1 % to 3,157.

Earlier in Asia, Japan’s Nikkei 225 index fell 0.8% to close at 8,488.71. South Korea’s Kospi index lost 0.1% at 1,863.74, while Hong Kong’s Hang Seng Index rose 0.5% to 18,813.41. Benchmarks in Singapore and Taiwan were also higher.

Mainland China’s benchmark Shanghai Composite Index lost 1% to 2,148.45, its lowest level in almost three years.