European shares down 7.6% ahead of G7 meeting

European shares tumbled to their lowest close in more than five years yesterday amid panic-selling which hit financials particularly hard on fears that frozen credit markets may spark a global recession.

The FTSEurofirst 300 index of top European shares lost 7.6 per cent to finish at 851.23 points - its lowest close since July 2, 2003.

The pan-European benchmark fell as much as 9.9 per cent earlier in the session and had its worst week on record with a drop of 22 per cent.

Britain's benchmark FTSE 100 index lost 8.9 per cent, the French CAC fell 7.7 per cent and Germany's DAX shed seven per cent.

"The new lows we've seen in stock markets this week are the result of panic selling," said Joost van Leenders, asset allocation specialist at Fortis Investments.

The DJ Stoxx European bank index fell 10.4 per cent, with Royal Bank of Scotland down more than 25 per cent, Credit Suisse and Deutsche Bank dropping over 16 per cent each, Barclays falling more than 14 per cent and Societe Generale shedding 13 per cent.

Insurance shares lost nine per cent as Aegon fell almost 17 per cent, Legal & General 16 per cent, Old Mutual and ING Groep both nearly 13 per cent, and Swiss Life and Swiss Re 12.5 per cent each.

"There is simply panic and hopelessness. This is a bubble in reverse: Many market participants feel and believe that the correction is going too far, but no one has the strength of going against the flow," UniCredit said in a note.

Erste Bank pointed out that interbank market risk premiums had risen despite the central banks' liquidity injections.

"The distrust of the banks is likely to continue in the light of the negative reports of bank failures," Erste said in a note, estimating that financial institutions would face "billions" in additional write-offs.

Investors across asset classes were waiting for the outcome of meetings in Washington involving Group of Seven finance ministers and central bankers and the International Monetary Fund. Top of the market participants' wish-list was coordinated action to revive the frozen interbank and money markets.

"If credit markets do not open up and financial markets cease to operate, the downside is so substantial it is impossible to put a number on a floor in equity markets," Credit Suisse said in a global equity strategy note.

This was echoed by Markus Reinwand, equity strategist at German bank Helaba, who said: "The massive loss of confidence means that a further plunge cannot be ruled out."

Companies have begun to feel the pinch of the credit squeeze.

"Being able to secure any kind of financing is, as we speak, almost impossible, whereas banks were still open for business a few weeks ago," said Olivier Elamine, chief executive officer of German office property company Alstria.

"Having any kind of unfunded short-term financing requirement, regardless of the amount, can turn out being very difficult to cover," Mr Elamine said, adding that Alstria itself had no funding needs until November 2011.

Morgan Stanley said the current financial market environment represented "a clear and present danger" to the global economy.

"Pricing across a broad array of asset classes has moved to extreme levels of risk aversion as fear has dominated fundamentals in most markets," Morgan Stanley said in a note.