FEARS THAT Greece’s sovereign debt crisis could spill into the banking sector and spark another credit crunch hammered bank share prices yesterday and pushed the cost of protecting European bank bonds from default to the highest level in 13 months.

In an assessment of the crisis gripping Greece and the euro zone, Moody’s credit-rating agency warned that banks in Britain and Ireland as well as those in Portugal, Spain and Italy, all faced challenges if those countries suffered the same fate as Greece in being downgraded by the rating agencies.

Moody’s said lenders faced “very real, common threats” from the region’s fiscal crisis.

The ratings firm also said it may downgrade the Portuguese government and its banks after Standard Poor’s last week cut the sovereign debt of Greece, Portugal and Spain.

The warning by Moody’s came as analysts at French bank BNP Paribas calculated that one of the measures they use to measure risk of defaults had reached “unprecedented” levels, topping those registered in the days after Lehman Brothers collapsed in 2008.

“The market is implying that the financial system is backed by the sovereigns,” said Rajeev Shah, credit strategist at BNP Paribas. “A lot of the risk has moved from the financial system to the sovereigns but if contagion keeps spreading it effectively moves back to the financial system.”

The Markit iTraxx Financial Index of credit-default swaps on 25 banks and insurers soared as much as 40 basis points to 188, according to JP Morgan Chase prices.

– (Guardian service/ Bloomberg)