European shares at two-month low

European shares fell to a two-month closing low yesterday, led by banking stocks, as concern grew that the sector could be faced with further problems stemming from the meltdown in the US subprime mortgage market.

The pan-European FTSEurofirst 300 index ended down 0.7 per cent at 1,495.10 points, its lowest close since mid-September.

Financials accounted for about half of the fall of the benchmark index, and the DJ Stoxx European banking sector index was down 1.6 per cent.

Royal Bank of Scotland led decliners and fell 4.3 per cent, while HSBC dropped 1.5 per cent.

The Irish market held up reasonably well amid the declines in other markets on what one Dublin dealer described as a pretty featureless day. The Iseq index closed just 0.2 per cent lower at 6,969, the first time it has ended the day below the 7,000 level in almost two years.

The Irish financials put in a mixed performance, with Bank of Ireland and AIB holding up reasonably well, as one dealer dared to suggest that the worst may be over for the Irish banks.

He said that at last there had been some buying interest in the banks, although he remained sceptical as to whether this was the start of a turnaround.

Anglo Irish Bank, meanwhile, had a rocky ride, trading as high as €9.63 and as low as €9.24 before closing 0.4 per cent lower, at €9.48. Almost seven million shares changed hands, making it the busiest of the Irish financial stocks.

Banks in general have suffered at the hands of the continuing credit crisis in the financial markets. A new analysis from Goldman Sachs has found that the slump in global credit markets is likely to force banks, brokerages and hedge funds to cut lending by $2 trillion (€1.37 trillion), triggering the risk of a "substantial recession" in the US.

Losses related to record US home foreclosures using a "back-of-the-envelope" calculation may be as high as $400 billion for financial companies, Jan Hatzius, chief economist at Goldman in New York, wrote in a report. The effects may be amplified tenfold as companies that borrowed to finance their investments scale back lending, the report said.

"The likely mortgage credit losses pose a significantly bigger macro-economic risk than generally recognised," Mr Hatzius wrote. "It is easy to see how such a shock could produce a substantial recession" or "a long period of very sluggish growth", he wrote.

Goldman's forecast reduction in lending is equivalent to 7 per cent of total US household, corporate and government debt, hurting an economy already beset by the slowing housing market.

Wells Fargo chief executive John Stumpf said yesterday that the housing market was the worst since the Great Depression. - (Additional reporting: Bloomberg)