Deepening euro crisis hits stocks, bonds, euro

Wednesday, 13 July 2011 00:00 - - {{hitsCtrl.values.hits}}

Reuters: Investors dumped the euro, peripheral euro zone government debt and European shares on Tuesday as officials struggled to contain fears that the euro zone debt crisis was spreading to Italy and Spain.

In a bid to keep Italy and Spain from the same fate as Greece, Portugal and Ireland, euro zone finance ministers promised on Monday cheaper loans, longer maturities and a more flexible rescue fund.

But markets came under pressure as they set no deadline, and

Dutch Finance Minister said a selective default for Greece was no longer being excluded.

“Italy and Spain have been thrown into the mix, and they are far bigger in magnitude than Greece, Ireland and Portugal. This could be a true systemic crisis,” said Andrew Lim, analyst at Espirito Santo in London.

There was some respite for Italian assets after speculation swirled that the European central bank was buying Italian and Spanish paper, even though traders who usually see those transactions said they had seen no evidence of such trades.

The costs of insuring against a default by the euro zone’s peripheral issuers hit record highs, and Italian and Spanish bond yields spiked higher.

Italian 10-year government bond yields broke above 6 percent for the first time since 1997. Traders said a move toward 7 percent could be a tipping point for bond yields, making the cost of refinancing unsustainable.

Italy’s short-term borrowing costs jumped in the first test of appetite for its paper since the recent surge in investor nerves.“Italy is by far the country with the greatest sensitivity to rising debt servicing costs and particularly in terms of rolling over debt,” said Mark Ostwald, strategist at Monument Securities.

“This is not a situation which it can afford to have going on for any sustained period of time.” The euro hit four-month lows of $1.3837 and fell to a record low against the safe-haven Swiss franc. “Italy has moved very, very quickly to catch up with Spanish yields, and the market has woken up to the fact that there’s a much larger problem. That’s what precipitated the large fall (in the euro),” said Adam Myers, senior FX strategist at Credit Agricole CIB

European shares also came under pressure, with bank stocks slumping more than 3 percent to two-year lows.

Brent crude oil futures fell 2 dollars on fears about slowing energy demand. World stocks and U.S. equity futures were down about 1 percent heading into U.S. trade.