Investors flee to safe havens
European shares tumbled again yesterday as leaders failed to come to an agreement on how to end the debt crisis and Eurozone officials told member states to prepare for Greece to leave the currency.
The UK, Germany and Finland all saw borrowing costs fall to record lows as investors fled risky assets in favour of their “safe haven” bonds, while yields jumped again for governments in Italy, Spain and Greece.
Last night’s informal EU summit, as expected, reached no conclusions on how to deal with the crisis.
Ahead of the summit, European Council leader Herman van Rompuy insisted that the meeting was only set to “discuss what how we can stimulate growth and jobs,” rather than being aimed at coming up with hard proposals.
“We are preparing the group for firm decisions in June,” he said.
The stage had already been set for deadlock as French President Francois Hollande argued in favour of jointly-guaranteed eurobonds as a means of extending German financial power to troubled Greece, Spain and Italy.
However, German chancellor Angela Merkel made it clear she would not spend more German cash supporting weak governments’ debt.
Meanwhile documents emerged showing the Eurogroup Working Group (EWG) has advised Eurozone members to prepare contingency plans to work out how they will cope with a Greek exit.
Belgian finance minister Steven Vanackere confirmed he was looking at how best to cope with the fallout of a country leaving.
“We must insist on efforts to avoid an exit scenario but that doesn’t mean we are not preparing for eventualities,” he said. “I believe many countries have their contingency plans for the things they want to avoid at all cost, and to say that we don’t have a contingency plan would be irresponsible.”
Markets tumbled on the uncertainty, with the Italian FTSE MIB falling 3.68 per cent, Spain’s IBEX dropping 3.31 per cent, France’s CAC losing 2.62 per cent and the FTSE 100 falling 2.53 per cent.
Investors also sold weak governments’ bonds – 10-year borrowing costs for Italy rose 8.9 basis points (bp) to 5.667 per cent while Spain’s jumped 12.6bp to 6.204 per cent.
Meanwhile “safe haven” bonds fell even further, as Germany sold two-year debt with a zero per cent coupon and its 10-year borrowing costs dropped 8.4bp to 1.38 per cent, while the UK’s fell 9.9bp to 1.77 per cent.