European Stocks Slump; Stoxx 600 Index Has Worst Week on Record

Oct. 10 (Bloomberg) — European stocks tumbled, driving the Dow Jones Stoxx 600 Index to its worst week on record, amid concern the deepening credit crisis will send the global economy into recession.

Rio Tinto Group, E.ON AG and Barclays Plc fell more than 10 percent. Nobel Biocare Holding AG plummeted 26 percent after the world’s largest maker of dental implants said it may not meet its full-year guidance. Total SA sank 8.4 percent as oil slipped below $80 a barrel on concern the economic slowdown will stifle demand.

The Stoxx 600 slumped 7.6 percent to 204.97 as of 4:30 p.m. in London, extending this week’s decline to 22 percent, the most since records began in January 1987.

“We have reached the panic stage,” said Espen Furnes, an Oslo-based fund manager at Storebrand Asset Management, which has the equivalent of $48 billion. “This is worse than 1987 because then it was largely confined to the stock market, with limited effects on the underlying economy. Fundamentals don’t count anymore.”

Credit-default swap dealers set an initial value of 9.75 cents on the dollar for Lehman Brothers Holdings Inc. bonds in what may be the biggest-ever payout in the $55 trillion market. An auction held between dealers today is determining how much buyers of default protection can claim after New York-based Lehman filed for the largest bankruptcy with $128 billion in bonds outstanding.

Shares earlier pared some of their declines after Italian Prime Minister Silvio Berlusconi said European Union and Group of Eight leaders are discussing the idea of closing the world’s financial markets while they “rewrite the rules of international finance.” Berlusconi later reversed his comments, saying “I heard it on the radio” and that the hypothesis wasn’t put forward by any leader or himself.

`Seized Up’

More than $25 trillion has been erased from global equities in 2008. Central banks from London and Frankfurt to Washington and Hong Kong this week were forced to cut interest rates after the yearlong credit-market seizure stoked concern banks will run short of money.

The cost of borrowing in dollars for three months jumped to the highest level since Dec. 27, the British Bankers’ Association said.

The London interbank offered rate, or Libor, that banks charge each other for such loans rose 7 basis points to 4.82 percent, the BBA said today. The Libor-OIS spread, a gauge of cash scarcity among banks, widened 11 basis points to 365 basis points. One basis point is 0.01 percentage point.

`Dangerous Mix’

“A very dangerous mix has taken place in the money and credit markets and hedge funds are clearly withdrawing flows from equities,” said Francisco Salvador, director at Venture Finanzas SA in Madrid. “We are waiting for some rational order to be restored, and very abrupt sell-offs are always followed by abrupt rebounds, but meanwhile we’ll see panic.”

The VStoxx Index, which measures the cost of using options as insurance against declines in the Euro Stoxx 50 Index, surged 39 percent to 81.03 today, the highest since records began in 1999.

National benchmark indexes decreased more than 4 percent in 16 of the 17 western European markets that were open. Germany’s DAX fell 7.2 percent. The U.K.’s FTSE 100 lost 8.5 percent, while France’s CAC 40 retreated 8.8 percent.

Iceland yesterday suspended equity trading today until Oct. 13 after the government seized Kaupthing hf, the country’s biggest bank.

Halting Trade

Exchanges in Russia and Ukraine were suspended indefinitely. Russia’s government will start buying stocks of domestic companies next week to help support prices, Prime Minister Vladimir Putin said.

Consob, Italy’s securities-market regulator, banned all short sales on the country’s stocks.

The cost of default protection on corporate bonds soared to records on concern the credit crisis will trigger more failures. Credit-default swaps on Europe’s benchmark Markit iTraxx Crossover index surged 63 basis points to 736, according to JPMorgan.

“The wheels of commerce have effectively seized up,” said Kate Schapiro, who oversees $250 million in equities at Sentinel Asset Management in San Francisco. “Trapped by the fear of losing everything, we’re seeing one-sided selling.”

The International Monetary Fund will use a “rapid-fire” emergency-loan program to lend hundreds of billions of dollars to emerging markets as the credit squeeze threatens to hobble nations that until this year were weaning themselves off the fund’s aid.

Rio Tinto, Barclays

Rio Tinto, the world’s third-largest mining company, lost 11 percent to 2,456 pence. E.ON, Germany’s biggest utility, sank 11 percent to 25.09 euros.

Barclays slipped 14 percent to 207.25 pence. The U.K.’s second-biggest bank said it’s “considering a number of options, including capital raising, relating to the industrywide commitment.”

U.K. banks as a whole have until the end of the year to add 25 billion pounds ($42 billion) to their reserves under the government’s plan, Barclays said in the statement.

The MSCI Europe Index traded at 8.61 times the current earnings of the companies in the index yesterday, the cheapest since September 1981, according to data from JPMorgan Chase & Co. in London. The MSCI World Index traded at 10.85 times, the lowest since October 1982, the data show. The S&P 500 traded at 17.39 times earnings, the cheapest since September 2007, based on data compiled by Bloomberg.

Nobel Biocare

Nobel Biocare tumbled 26 percent to 21.38 francs. Before today, the company expected sales to rise in the “low single- digits” while profitability on earnings before interest and taxation was supposed to remain at 2007 levels at a constant exchange rate.

Chief Executive Officer Domenico Scala, the former Syngenta AG executive brought in to replace Heliane Canepa in July 2007, said Aug. 11 there were “encouraging initial signs” of recovery and that the worst might be over in the U.S. market.

Total, Europe’s third-largest oil company, dropped 8.4 percent to 32.945 euros. Royal Dutch Shell Plc, the region’s biggest, sank 8.2 percent to 1,319 pence.

Crude for November delivery fell as much as $7.98 to $78.61 a barrel in New York. Copper slumped in London, set for its worst week in more than two decades.

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