Fears grow over second EU debt crisis

FEARS of a second European Sovereign debt crisis grew yesterday as economic data showed Ireland’s second quarter GDP fell while uncertainty over how the country will support its banking sector triggered a sell-off in its bond markets that sent gilt yields to a record high.

The sell-off came after the Irish government signalled that holders of Anglo-Irish bank’s €2.4bn worth of subordinate debt may have to accept a “haircut”, as it confirmed it would extend its bank guarantee scheme for three months.

The spread on five-year Irish sovereign credit default swaps (CDS) widened to as much as 490 basis points (bps) yesterday, meaning the cost of insuring $10m of debt over five years jumped to $490,000.

Meanwhile, the spread on five year Portuguese CDS widened to 419 bps from 391 bps and Italy widened to 204 bps from 195 bps. The Spain five-year CDS spread was at 242 bps versus 234 bps on Wednesday, while Greece widened to 828 bps from 813 bps.

Spanish telecommunications giant Telefonica also cancelled a bond sale on concerns about the creditworthiness of the Eurozone’s most indebted nations.

Official figures showed Ireland’s GDP fell 1.2 per cent in the second quarter as imports grew unexpectedly.

More broadly, economic data showed the manufacturing and services sectors in the Eurozone slowed more than expected in September.

The Eurozone Purchasing Managers Index (PMI), compiled from surveys of around 2,000 businesses ranging from banks to restaurants, showed sentiment fell to 53.8 in September from 55.9 in August, its lowest reading since February.

The index also indicated Ireland, Spain and Italy were in danger of falling back into recession.