Disintegration
INVESTORS panicked yesterday as the European Commission (EC) warned of “financial disintegration”, fleeing risky assets and pushing Spanish and Italian borrowing costs close to breaking point.
The latest polls in Greece showed the anti-bailout party Syriza back in the lead – putting the country back on the path to leaving the Eurozone and sending stocks plummeting.
Cash poured into safer German, British and US government debt, pushing the countries’ borrowing costs to record lows as desperate investors fled risky assets.
The rush hammered equities, putting the FTSE on course for its worst month since August when the crisis last reached fever-pitch.
The EC argued that the joint issuance of eurobonds would help bring an end to the crisis by restoring certainty in countries’ abilities to pay their debts.
“An early confirmation of the steps to be taken will underscore the irreversibility and solidity of the euro,” it said, also calling for increased integration of financial markets and economic governance across the Eurozone.
The issuance of jointly-guaranteed eurobonds has been backed by French President Francois Hollande and Italian Prime Minister Mario Monti, who would stand to benefit from lower borrowing costs as their debts would be backed by Germany, but opposed by German leader Angela Merkel as her taxpayers would be on the hook for other states’ spending.
The European Commission’s report also appeared to signal support for using the Eurozone bailout fund to bail out banks directly saying it “might be envisaged”. But commissioner Olli Rehn said it “is not an available option.”
Meanwhile a poll put Greece’s anti-bailout Syriza party on 30 per cent, ahead of pro-bailout New Democracy’s 26.5 per cent.
If those results are repeated in next month’s general election and Syriza forms a government, it could lead to an attempted renegotiation of the bailout package, which other nations say they will not accept – potentially leading to another Greek default and the country leaving the Eurozone.
Greece is already starting to be frozen out of markets, with two of the world’s biggest trade insurers, Euler Hermes and Coface, saying yesterday that they will no longer offer protection to companies making new exports to the country, although they will honour existing contracts.
The increased uncertainty pushed Spain’s 10-year borrowing costs up 21 basis points (bp) to 6.656 per cent – perilously close to the seven per cent “danger zone” beyond which Ireland, Greece and Portugal needed bailouts.
Italy’s 10-year yields jumped 16.8bp to 5.934 per cent while Greece’s shot up another 64.5bp to 30.127 per cent.
Stocks plunged as investors cleared out of all risky assets, driving the FTSE 100 down 1.74 per cent, the French CAC down 2.24 per cent, Italy’s FTSE MIB down 1.79 per cent and Spain’s IBEX 2.58 per cent.
Many investors moved into safe haven government bonds – Germany’s 10-year borrowing costs slid nine basis points to 1.27 per cent, the UK’s fell 13.1bp to 1.65 per cent and the US’ dropped 11.8bp to 1.63 per cent.