European shares drop again as ECB warns over banks

European shares suffered a fresh sell-off yesterday after an ECB warning of new bank write-downs added to lingering concerns about Europe’s debt crisis. In late morning trading in London, the FTSE-100 index of leading British shares showed a loss of 2.06 percent at 5,1081.36 points as BP plunged nearly 14 percent after its latest attempt to fix the US oil spill disaster failed.

In Paris the main CAC-40 index showed a mid-morning fall of 2.20 percent at 3,430.78 points and in Frankfurt the DAX index of leading German stocks was down 2.01 percent at 5,844.68 points.

In Madrid the Spanish Ibex-35 index, which has suffered heavy losses recently over concerns about Spain's debt and the country's embattled savings banks, fell 3.15 percent to 9,065 points.

Banks led the way lower after the European Central Bank had suggested that eurozone banks might have to reduce the value of their assets by a total of  €195 billion by 2011.

In London shares in energy giant BP nose-dived more than 15 percent before pulling back to a loss of 13.6 percent at 427.5 pence after its latest setback trying to plug the spilling

The Greek government has reportedly been advised by British economists to leave the euro and default on its €300 billion debt to save its economy.

The London based consultancy, Centre for Economics and Business Research (CEBR), has warned Greek ministers that they will be unable to escape their debt trap without devaluing their own currency to boost exports. The only way this can happen is if Greece returns to its own currency.

Greek politicians have played down the prospect of abandoning the euro, which could lead to the break-up of the single currency.

The euro plunged after Spain was stripped of its top-level credit rating by Fitch Ratings over concerns about its economic growth.

In the latest blow to the eurozone, which is struggling to cope with the fallout from the Greek fiscal crisis, Fitch downgraded Spain’s sovereign credit rating by a notch from the top AAA rating to AA+.

Standard & Poor’s, another ratings agency, downgraded Spain’s rating for the second time to AA last month but Moody’s, the other leading agency, has maintained the rating at AAA. Any downgrade in a sovereign credit rating will push up the interest that a country must pay on its debts.

Fitch queried Spain’s forecasts for economic growth, highlighting that the inflexibility of the labour market and the restructuring of regional and local savings banks could act as a drag on growth.