Financial markets in disarray as Spain is drawn into the eurozone vortex
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UPDATED:
14:12 GMT, 17 May 2012
Stock markets across Europe slid into the red yet again today and the euro's fall continued as Spain looked like being dragged into the eye of the eurozone storm.
Not only did the bond markets force Spain to pay punitive and unsustainable rates to borrow, but also shares in the country's fourth-biggest bank Bankia plunged 22 per cent as its customers fled.
As markets were already struggling to digest a Greek exit and a possible euro break-up, the FTSE 100 index slid 74.8 points to a six-month low of 5,330.4, a 1.4 per cent drop.
Don't look now: Stock markets across Europe are digesting the implications of the eurozone crisis
The French and German markets were also more than 1 per cent down and the euro dropped yet again against the dollar to $1.265, bringing its fall to more than 5 cents in the last two weeks.
A euro was worth $1.45 eight months ago.
With the eurozone storm gathering in intensity, David Cameron issued a dire warning to European leaders on the fate of the single currency.
The Prime Minister warned of ‘perilous economic times’ as he urged Germany and other major European nations to either take responsibility for the monetary union or allow it to break up.
‘The eurozone is at a crossroads – it either has to make up, or it is looking at a potential break-up,’ the Prime Minister said in a speech in Manchester.
The money markets seem to agree with him: while Spain successfully raised €2.5billion in its bond issue today, the borrowing costs soared to unsustainable levels. It paid 5.1 per cent on its three and four-year debt – a full half as much again it had to in March.
In contrast, the safe-haven UK paid just 0.35% today to raise 1.5billion for two years.
'The auction was well covered, however yields sky-rocketed … How long Spain can continue to pay such high interest is yet to be seen,' said Craig Erlam, market analyst at Alpari (UK).
Spain's benchmark borrowing costs have jumped above 6 per cent since the Greek election raised the prospect of an inglorious exit from the eurozone and a deepening of the bloc's crisis.
At one point this week Spain's benchmark 10-year yield touched 6.5 per cent and currently stands at 6.39 – dangerously close to the critical 7 per cent level that would put Spain in danger of insolvency.
Prime Minister Mariano Rajoy has warned that the country risked being frozen out of capital markets because of the sky-high interest rates, or yields, it would have to pay to maintain its debt.
Bankia's shares suffered a massive sell-off after a report in national paper El Mundo that customers had withdrawn more than €1billion from their accounts in the past week.
Investors are concerned that a messy Greek exit from the currency bloc could destabilise Spain's financial sector and that the banks might not be able to meet tough new provisioning requirements and require bailouts.
The Government rescued Bankia last week as mounting concerns over its property loans threatened its survival.
Customers of Greek banks are also reported to have withdrawn funds in anticipation of its exit from the euro, adding to anxiety among investors about the lack of a firm plan to deal with the region's worsening crisis.
'It's not Greece leaving the euro that is the major issue, it's the domino effect,' said John Bearman, chief investment officer at Thomas Miller Investment.
A move by the European Central Bank to stop providing liquidity to some Greek banks, which are severely under-capitalised, only added to the pressure.
While a warning from the new French government that it will not ratify the European pact on fiscal discipline unless it is amended to include ambitious commitments to promote economic growth, underscored the spilt a the heart of Europe over how to deal with the debt crisis.