Fear returns to markets

CONFIDENCE in politicians’ ability to solve the debt crises of the developed world collapsed yesterday, sending bank shares into a tailspin and ramping up the cost of sovereign borrowing.

As US politicians bickered over the debt ceiling and investors fled EU financial stocks, Italy was forced to cancel a bond auction set for August on fears that investors are demanding an unaffordable premium for cash.

Yields on Italy’s 10-year debt rose nearly 20 basis points to 5.6 per cent, with spreads against German gilts also widening, and equivalent Spanish yields jumping by a similar amount to six per cent – viewed as a dangerous threshold for sovereign debt interest.

The Swiss franc notched up record highs against the dollar, and nervy investors also sent gold prices surging.

And banks saw billions wiped off their market cap: the value of the UK’s main four banks alone dropped by £4.5bn, with Barclays falling 4.4 per cent and Lloyds losing five per cent.

On the Continent, the losses were worse still: Belgian bank Dexia plunged 8.2 per cent and Italian lenders Intesa Sanpaolo and Unicredit dropped 8.3 per cent and seven per cent respectively.

Observers put the loss of faith down to growing signs of an economic slowdown amid emerging details of the new Greek bailout deal struck on Thursday. Many were stunned that despite a €109bn bailout, Athens’ debt burden is still forecast to rise next year.

And in the US, there were few signs of a consensus emerging as the IMF urged the nation to get past its debt impasse. Republicans and Democrats announced separate plans to raise the legal debt ceiling before Washington runs out of cash next Tuesday.

Republicans in the House, led by speaker John Boehner, will push legislation to cut $1.2 trillion in spending over 10 years in exchange for a short-term $1 trillion increase in the borrowing limit, with no tax hikes.

Democrats hope to trim $2.7 trillion from the deficit over 10 years but allow the US to keep up debt payments until after next year’s election.