US STOCKS - Banks pull Wall St to 13-month low on Europe fears

Reuters

3 October, 2011

* S&P 500 index on verge of entering a bear market

* Moody's warns on Dexia's liquidity

* Risk of negative feedback as U.S. banks sink

NEW YORK, Oct 3 (Reuters) - U.S. stocks slumped in heavy volume to a 13-month low on Monday as investors dumped bank shares on fears that Greece's worsening financial crisis could cause a large European lender to fail.

Investors pegged losses to the sharp fall in Franco-Belgian financial group Dexia (DEXI.BR), which fell 10 percent after a Moody's warning about its liquidity due to concerns about exposure to Greece.

Markets have feared European officials will be unable to prevent Greece's fiscal crisis from turning into a global banking crisis. Greece said it will miss its deficit targets this year and next, which could limit the country's ability to receive more aid. For details see 

"Most investors fear that markets in Europe are going to run well ahead of politicians that are not going to be able to get any kind of reasonable solution," said Jack de Gan, chief investment officer at Harbor Advisory Corp in Portsmouth, New Hampshire.

U.S. banks have become a target for speculators. Morgan Stanley (MS.N) closed at its lowest since December 2008, and the cost to insure its debt has jumped as other banks hedge counterparty exposures and traders bet on the situation worsening. 

The recession that wiped 12 years of gains off the S&P 500 was caused in part by a credit crisis.

"We are going to have a disorderly default in Greece and there could be another banking crisis in Europe as they are undercapitalized and loaded with (sovereign) debt," De Gan said.

Morgan Stanley has been the most volatile bank in recent weeks, with the cost to insure its debt rising to November 2008 levels, according to Markit data.

Morgan Stanley shares fell 7.6 percent to $12.47 and the S&P financial sector .GSPF was down 4.5 percent.

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