Greek crisis rocks heart of eurozone

STOCKS tumbled and the cost of Greek borrowing soared to new highs yesterday as investors fretted that the sovereign crisis is spreading to core Eurozone countries.

Following ratings agency S&P’s decision to put Italy on a negative credit watch on Friday, Belgium was hit by a revision to a negative outlook by Fitch yesterday. Economists are also anxious over political divisions in Spain after a weekend of demonstrations against austerity cuts followed electoral losses for the ruling Socialist Party.

Negotiations between the EU, the IMF and Greek Prime Minister George Papandreou (pictured) appear mired in confusion, with an announced scheme to raise the value of national privatisations to €5.5bn (£4.7bn) having little effect on market confidence.

EU economics commissioner Olli Rehn added to the chaos yesterday by saying that “a voluntary extension of loan maturities, so-called reprofiling or rescheduling on a voluntary basis could also be examined on the condition that it would not create a credit event”.

But ratings agencies have warned that a voluntary restructuring would count as a default, which is likely to be seen as a “credit event”.

Rehn also raised the possibility that Athens could be bailed out through loans to its creditors, which he called a “Vienna-type initiative” after an accord struck during the financial crisis.

Investors have been spooked by a divergence of views in the EU, with the European Central Bank ruling out a restructuring even as European Commission officials talk openly about the possibility.

The FTSE 100 dropped to a two-month low, losing 1.9 per cent over the day, while the Eurostoxx 50 closed down 2.1 per cent. Banks with exposure to Eurozone peripherals were worst hit: RBS closed down 1.5 per cent, Banco Santander lost 1.7 per cent and BNP Paribas dropped 1.8 per cent.

Yields on Greece’s two-year debt rose over 26 per cent and its ten-year yields jumped over 17 per cent for the first time. Spain saw its five-year debt costs spike to a new high of 4.95 per cent.