Bank shares, credit tumbles as Greece nears default

European traders panicked on news that German credit markets are preparing for a Greek default on bond debt.

Greek credit default swaps now point to a 97% chance of default, while already sky-high two-year yields continued to rise.

French banks dropped sharply on fears of potential downgrades by ratings agency Moody’s Investors Service amid concerns over exposure to Greek debt.

“Investors currently value European banks at levels last seen when Lehman Brothers Holdings Inc. collapsed” in 2008, said Stephen Pope, managing director of Spotlight Ideas, a London consulting firm. “One cannot overstate the fear that over a Greek default” and a subsequent escalation of debt contagion fears.

The euro, which until last week had proven relatively insulated against sovereign debt turmoil, extended a slide versus major rivals to hit a 10-year low versus the Japanese yen. The shared currency traded at ¥104.95 in recent action, down 0.5% after trading as low as ¥103.88.

The euro EURUSD +0.63% tested the $1.3500 area versus the dollar, but bounced back on short covering to trade at $1.3618 in recent trade, up 0.1% from Friday.

Safe-haven flows sent the two-year German bund yield to a record low. The yield traded at 0.381% in recent action, according to data from electronic trading platform Tradeweb. The Greek two-year yield rose, topping 66%.

Italian and Spanish government bond yields rose, with the 10-year Italian yield rising by around 15 basis points to 5.46%. That pushed the yield premium over 10-year German bunds to around 3.73 percentage point from around 3.69 percentage points Friday.