Concern over Eurozone hits the markets

 
Julian Harris
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JITTERY markets were shaken yesterday over escalating fears of a potential default by the Greek government and subsequent contagion spreading to other Eurozone states.

The yield on Greek one-year bonds exploded past the 100 per cent mark, rising nearly a fifth to over 117 per cent. Investors are demanding more than double their money back to pay for the risk of lending to the sovereign for just 12 months.

Senior German politicians including Angela Merkel (right) are believed to be rapidly losing patience with Greece, stoking fears that the political will to deliver another bailout could be on the wane.

“The fear goes well beyond Greece. The yields at Italy’s T-bill auction surged, signalling that contagion is real,” said David Thebault of French broker Global Equities.

One year Treasury bills were sold at an average of 4.15 per cent – way above the last similar bond auction, in August, which sold at 2.96 per cent. Italy’s outlook was knocked by figures that revealed a 0.7 per cent dip in industrial production in July..

Italian credit default swaps (CDS), which measure the probability of a default, hit record highs above 500 basis points as markets fretted over the country’s ability to raise money at affordable rates to finance its huge debt burden.

Greek CDS showed an eye-watering $5.8m upfront cost of insuring $10m in Greek debt, with a further £100,000 per annum.

Even gold sank yesterday as investors sold the metal after last week’s record highs to cover losses elsewhere, including European equity markets, which were pushed to two-year lows by growing fears about the debt crisis.

The Eurostoxx 50 was down 3.8 per cent in the day’s trading; the French CAC 40 was down over four per cent; Germany’s DAX index fell nearly 2.3 per cent.

The MSCI World Index was down nearly three per cent, as fears over the Eurozone spread well beyond its borders.

POLITICS: TALKING SHOP CHATTERS ON

CHANCELLOR Angela Merkel is sympathetic with the hard lines taken by some coalition partners, after they spoke publicly on the option of Greece departing from the currency bloc or carrying out an orderly bankruptcy.

Economy minister Philipp Roesler, who leads junior coalition party the Free Democrats said in an article for daily Die Welt that to stabilise the euro there could “no longer be any taboos”. Meanwhile in troubled Italy, prime minister Silvio Berlusconi yesterday promised an austerity bill would be approved quickly without further changes, seeking to calm fears that Italy had lost the will to push through the unpopular plan. The €54bn package, aimed at balancing the budget by 2013, is in the final stages of a parliamentary approval process after weeks of changes to the measures, squabbling among allies and public protests that have unnerved European partners and bond markets. Rumours again circulated last night that Italy was expecting China to come to its rescue. A report in the Financial Times claimed that negotiations are underway between China Investment Corp and the Italian authorities over debt-buying.