European stocks slump and Italy’s banks suffer as Greek relief wanes

EUROPE yesterday showed signs that confidence was unravelling after a tepid response to Greece’s latest bailout, as the tiny Eurozone island of Cyprus swung closer to a bailout.

The Dax plummeted more than 2.8 per cent, dragging the Eurostoxx 50 down 2.9 per cent, although the FTSE fell just 0.7 per cent.

Trading in shares of Intesa Sanpaolo – Italy’s largest lender – and Banca Monte dei Paschi were suspended due to falling too quickly. Both banks had plunged more than 7.8 per cent by the day’s close, while Unicredit fell 4.3 per cent.

Italian ten-year yields also shot above six per cent – seen as a dangerous threshold for European debt – and the spread between yields on Italian debt and equivalent German bunds rose to 350 basis points.

The cost of Spain’s ten-year debt continued to move northwards high above the six per cent line, reaching 6.2 per cent.

Traders were even less impressed with the euro than with the US dollar: the single currency fell by more than one per cent against the greenback throughout yesterday. It also set a new record low of less than SFr1.1 against the Swiss franc.

European jobs figures gave little cause for joy: the overall unemployment rate stayed at 9.9 per cent but the numbers of unemployed workers rose by 18,000.

Cyprus also stirred up unease in the bloc after its biggest bank, the Bank of Cyprus, said there was an “imminent threat” of the country “joining the European Union support mechanism”.

The country’s banking sector holds around €5bn (£4.4bn) worth of Greek sovereign debt and is heavily reliant on the stricken country for trade. The yield on its 10-year bonds was at 10.54 per cent yesterday, up from 9.71 per cent on Friday.

WINNERS AND LOSERS

John Boehner
Bragged that the GOP got 98pc of its wishes, but has been bruised by the fight to get there, with his tactic of brinkmanship unlikely to win him popular favour. Will be pleased the balanced budget amendment survived.

Harry Reid
Though his plan to boost the debt ceiling by $2.7 trillion straight off was rejected, Reid has always been prepared to compromise. Will be pleased to have helped push the deal through, despite angering some liberals.

Mitch McConnell
Has raised his profile by
staying at the centre of negotations and making sure pain was shared among parties at the table. With a default avoided his case to be majority leader in 2013 is strong.

Barack Obama
Can take solace from the fact that the debt ceiling will be raised through the end of his first term, and that any automatic cuts will hit in the areas Democrats would favour. But his approval rating has dropped significantly, and his reputation within his own party has been damaged by worries that concessions to the Republicans have set a precedent for future fiscal negotiations.