DEBT CRISIS ESCALATES

ITALY suspended trading in government and corporate bonds yesterday as the release of the EU’s stress tests plunged the region deeper into a crisis that some analysts are comparing to the fall of Lehman Brothers.

The panic saw billions wiped off the value of Europe’s banks and interest rates on Italian ten-year debt climb above six per cent before trading was shut down. The euro hit a new record low against the Swiss franc; gold reached a new high of $1,600 (£1,000) an ounce; and the FTSE and Dax both dropped 1.55 per cent.

The market cap of Britain’s biggest banks shrank by £6.3bn, with Lloyds plunging 7.5 per cent, Barclays 3.7 per cent and RBS six per cent.

Overall, Europe’s financial stocks sank to their lowest levels in two years. Italian Unicredit and Intesa Sanpaulo both dropped by over six per cent and UBI by more than five.

Credit markets showed the contagion spreading to core EU nations, with Markit’s index of Western European sovereign credit default swaps (CDS) rising to an all-time high of 306 basis points, meaning it costs €306,000 to insure €10m of debt.

French CDS  widened to a new record of 123bps, Italy CDS climbed by 20bps to 326 and Greek CDS shot up 92bps to 2,507.

Greek bailout negotiations are still at an impasse with ECB president Jean-Claude Trichet refusing to consider any form of private-sector burden-sharing.

Figures out yesterday put to bed speculation that the ECB had intervened to bring down Italian yields last week, with the data showing that the Bank made no purchases.

Sovereign debt problems across the pond added to the gloom: the Dow closed 0.76 per cent down, and the Nasdaq down 0.89 per cent.