Perilous
Times
European stock markets rocked by panic selling as debt
crisis reignites
Investors demanding high premiums for holding Italian and Spanish
bonds as fears of double-dip recession grow
Heather Stewart, Larry Elliott and Giles Tremlett in Madrid
The Guardian, Wednesday 11 April 2012
Stock market panic selling led to shares falling across the world
with the FTSE100 down 128 points. Photograph: Frank Baron for the
Guardian
Europe's sovereign debt crisis exploded back into life on Tuesday,
with markets across the continent rocked by a wave of panic
selling amid renewed fears about the impact of savage austerity
measures in Spain and Italy.
The mood of uneasy calm seen across Europe since the Greek bailout
in February was shattered as financial markets took fright at
evidence of a double-dip recession and growing popular opposition
to welfare cuts and tax increases.
Italy and Spain, the eurozone's third and fourth biggest
economies, were at the centre of the market turmoil, with
investors demanding an increasingly high premium for holding their
bonds.
"Spain is right in the centre of a European storm," admitted
finance minister Luis de Guindos, who declined to rule out an
eventual bailout but insisted it could be avoided.
In Italy, Mario Monti's coalition government is facing growing
hostility to reforms of its labour market, while the sheer size of
the country's public debt made it an obvious target for nervous
traders. The prospect of Greek voters rejecting austerity and the
French electorate denying Nicolas Sarkozy a second term as
president was also weighing on the markets.
The Greek government said it would hold a general election on 6
May, with opinion polls showing support for the mainstream
pro-austerity parties is too weak to allow them to form a
government.
"Spain is a big focus right now and even Greece will be coming
back into the picture as it looks for another tranche of aid, so
this eurozone debt tragedy is not going away, but seems to be
getting worse," said Daniel Hwang, senior currency strategist at
Forex.com in New York.
Interest rates on 10-year Spanish bonds hit 6% for the first time
since January, when Europe's leaders were battling to agree a
bailout deal for Greece and secure the future of the eurozone.
Shares in Madrid dropped by almost 3% to hit their lowest level
since March 2009.
In Italy, share prices slumped by 5% on rumours that the
government was preparing to downgrade its growth forecasts, and
trading in the shares of several of its banks was suspended after
they fell sharply.
Shares were also much lower on Wall Street, where the fallout from
Europe exacerbated fears that the US recovery is petering out.
Disappointment at last week's unemployment figures had already
been weighing heavily on investor confidence.
The markets closed in New York with Wall Street completing a fifth
successive day of decline, with the Dow Jones having lost 213
points. In London, the FTSE 100 closed down 128 points, at
5,595.55. Oil prices also fell sharply amid concerns about the
prospects for growth on both sides of the Atlantic and in Asia,
with the price of a barrel of crude falling by more than $2.
In contrast, safe haven assets such as gold, the US dollar and
bonds in the US, Germany and Britain were all in demand. "The
market went up on a wave of liquidity-induced euphoria, and as
usual overshot. Now the clever boys have decided to get out," said
Charles Dumas of Lombard Street Research.
Europe's politicians had hoped that Greece's second bailout, and a
battery of emergency measures unleashed by the European Central
Bank, including its long-term "repo" operation, which offered
cheap money to troubled banks, would draw a line under months of
economic chaos. But Erik Britton, of City consultancy Fathom,
said: "The LTRO [long term refinancing operation] and all those
things, all it's done is bought a bit of time, but it hasn't
addressed the structural problems, even slightly, even for
Greece."
He predicted that the ECB could be forced to take fresh rescue
measures in the next few weeks to prevent strains in Europe's
banking sector from turning into a credit crunch, while in the
longer term several more countries – including Spain and Italy –
would eventually be forced to write off a proportion of their
debts before the crisis is over.
The euro came under pressure on the foreign exchange markets as
the mood darkened on Tuesday, losing 0.2% against the dollar, to
$1.3080, and more than 1% against the yen. David Song, Currency
Analyst at DailyFX, said: "The single currency is likely to face
additional headwinds over the near term as the region continues to
face a risk for a prolonged recession."
Spain's prime minister, Mariano Rajoy, speaking in the country's
senate, warned that his government must stick with its austerity
plans, saying: "There's no doubt that much of Spain's future is at
stake and also economic growth and the creation of jobs over the
coming years."
But the central bank governor, Miguel Ángel Fernández Ordóñez,
added to the mood of anxiety by warning that unless the economy
improves, the country's struggling banks will need a new
government bailout. Successive waves of austerity measures have
already driven Spanish unemployment to 23%. Some 50% of young
people are out of work.
Jane Foley, currency strategist at Rabobank, said: "The Spanish
government appears to be losing the battle to restore budgetary
credibility while each additional austerity measure serves to feed
the recessionary backdrop."
In London, Barclays shares fell by 6% to 206p and were the
second-biggest faller in the FTSE100 amid fears about its troubled
Spanish operation. In February Barclays borrowed €6bn from the
ECB's cheap loans scheme to pour into its Spanish operations.
The fresh bout of turbulence comes as the world's finance
ministers and central bank governors prepare to fly to Washington
next week for the half-yearly meeting of the International
Monetary Fund. Following the measures taken by the ECB, the fund
had been hopeful that the talks would be less fraught than those
last autumn, when Europe's leaders were told to get to grips with
their problems.
Christine Lagarde, the IMF's managing director, will almost
certainly use the renewed crisis in the single currency zone to
seek support for an increase in the fund's resources. But several
countries, including the UK, have signalled that they would be
reluctant to contribute significant new funds to the IMF unless
they can be convinced eurozone leaders have done everything
possible to tackle sovereign debt.