By Hugo Duncan
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Europe felt the wrath of the financial markets yesterday as the Greek election did little to allay fears about the future of the single currency.
The euro tumbled and borrowing costs in Spain and Italy lurched to dangerously high levels as the region spiralled deeper into crisis.
Analysts said victory for the pro-bailout New Democracy party in Greece’s second election in just six weeks merely delayed the inevitable break-up of the eurozone with a Greek exit still on the cards.
Marching to oblivion?: Markets were jittery over fears the single currency is set to collapse
It is also feared that Spain and Italy â€" the region’s third and fourth biggest economies â€" will require full-blown international bailouts following the earlier rescues of Greece, Ireland and Portugal.
Nick Eisinger, an analyst at Fidelity Investments, said Spain would need another £240billion on top of the £80billion bailout of the banking system agreed last week: ‘The market is very sceptical because the bank deal doesn’t really make any difference to the tricky and challenging position of the Spanish economy.
‘There’s a pretty strong likelihood that the Spanish sovereign will need some kind of funding programme in the next six to nine months.’
The euro fell more than 1 per cent against the US dollar to below $1.26 and was down 0.7 per cent against sterling to 80.3p as investors dumped the single currency and ran for cover.
The crucial 10-year bond yield in Spain â€" the amount the government pays to borrow â€" smashed back above 7 per cent to a euro-era high of 7.14 per cent. In Italy the bond yield rose above 6 per cent. The 7 per cent level is seen as psychologically important as it proved to be the point of no return for Greece, Ireland and Portugal.
Stock markets surrendered initial gains with the FTSE 100 index closing just 12.28 points higher at 5491.09 having been 80 points to the good in early trading.
Banking shares fell sharply with Royal Bank of Scotland down 5 per cent, Lloyds Banking Group 3.6 per cent and Barclays 2.4 per cent.
Ben May, an economist at Capital Economics, said: ‘The reaction in the financial markets said it all â€" investors are sceptical that the narrow victory of New Democracy in Sunday’s general election in Greece marks a turning point in the eurozone crisis. The election result merely shifted attention back on to Greece’s larger troubled neighbours.’
Kathleen Brooks, research director at currency experts Forex.com, said: ‘There is still the chance that a member of the eurozone will leave the currency bloc. Piecemeal can-kicking is not enough any more.’
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As usual I dont see it this way. "Borrowing costs in Spain and Italy lurched towards dangerously high levels" What it should have said is. Borrowing costs in Spain and Italy are climbing back to normal levels, perhaps not as high as the 10% seen in the 1970's when money was also scarce. Today's rise reflects that the real world disregards interest rates being kept artificially low like our BOE does. The real world is not linked to a fixed base rate but reflects supply and demand. It is reported that India has left its 8% Base Rate Unchanged. The Indian Bank said that " a cut in Interest Rates would have put pressure on consumer prices" Which is the exact opposite of what we have done. Perhaps we should reconsider what we do, put interest rates back up, give savers something to save for.
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Someone once told me that gambling addiction is worse than being an alcoholic. There's a limit to how much you can drink, but there is no limit to how much you can gamble if you have the credit. The 'casino bankers' have had unlimited credit and have blown the lot. Not 'their' money, of course! It's payback time. People having been paying themselves too much on the strength of future earnings, especially Gordon Broon, and now the cupboard is bare.
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