Terror stalks the markets

The prospect of a eurozone break-up intensified this week as borrowing costs around the region soared and the Dutch prime minister said it should be possible to expel some members from the currency union.

Investors are rapidly losing hope that a solution to the sovereign-debt crisis will be found and their fear was demonstrated by rising bond yields — the rate of interest governments have to pay to borrow — across almost all single-currency countries. Dutch Prime Minister Mark Rutte stoked fears that a collapse could become a reality when he aired the prospect of countries being ejected, albeit as a last resort.

“We would like countries to be able to be pushed out of the eurozone,” Rutte said on a visit to London. As analysts warned of “terror taking hold”, even some of those countries until now regarded as safe havens, such as the Netherlands, came under pressure as fears about countries’ creditworthiness spread into Europe’s core.

A bond expert described Tuesday as the most worrying day yet in the crisis. Mike Riddell, the manager of the M&G International Sovereign Bond fund, said France was now suffering a “full-blown run” on its debt. Riddell said that the credit default swap market — where investors in effect bet on the prospects of countries going bust — now indicated that the chance of France losing its coveted top AAA rating was near certain.

“Even the Netherlands, which the market perceives to be the second strongest eurozone sovereign, is coming under a bit of pressure,” he said.

France faced fresh criticism over its efforts to contain public debt in a new study from the Lisbon Council think-tank.

In Italy, Monday’s day of relative calm after Silvio Berlusconi’s exit gave way to renewed fears about the country’s economic and political future as bond yields climbed back through the 7% mark. That rise came in spite of the European Central Bank wading into the market to support Italian bonds.

The market has little faith that Italy’s newly appointed leader, Mario Monti, will be able to push through austerity measures that might get Italy’s deficit under control. Italy’s borrowing costs climbed amid Monti’s apparent struggle to form a Cabinet.

Grant Lewis and Emily Nicol at Daiwa Capital Markets described the eurozone crisis as “arguably more precarious than even at the back end of last week”.

In spite of the fall of the Berlusconi government, they said, the incoming prime minister faced huge challenges, not least in continuing to shrink Italy’s deficit against a backdrop of slowing growth.”

Italy’s growth figures for the third quarter have yet to be released, but the latest update for the eurozone does not bode well. The 17-nation group grew by just 0.2% during the quarter, and many forecasts expect the eurozone economy to contract in the final months of this year.

In Spain, there was more evidence of investors’ frayed nerves as the government was forced to pay out its highest borrowing costs in 14 years on new debt. Investors did come forward with enough money, but Spain’s borrowing costs shot up to more than 5%, compared with less than 4% at similar recent sales.

Belgium was victim to the same flight from eurozone bonds and yields on a sale of 12-month debt by Brussels were at a three-month high.

Investors were looking outside the currency union and Switzerland fared rather differently at its latest debt auction. Its sale of six-month bills yesterday had an average interest rate of -0.3%. In other words, investors are paying the Swiss government for the privilege of lending their money to the country.

Louise Cooper, markets analyst at BGC Partners, said the euro’s future was in the hands of the German leader: “[Angela] Merkel, the pressure is rising, momentum is building, now is your moment to prove that you really want to save the euro. Terror is stalking the markets and taking hold.”

The United Kingdom bond market was also one of the few beneficiaries of the heightened panic regarding the eurozone. Yields on UK government bonds, or gilts, fell — meaning their prices rose — and outperformed German government bonds. —

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