CONTAGION:MARKETS GAVE the thumbs down to the bailout yesterday as the euro slid and Italy was drawn into the crisis for the first time as its borrowing costs shot up.
Contagion fears remained high in the euro zone, with Italy, Portugal, Spain and Belgium all seeing their market interest rates rise.
Investors fretted that the permanent mechanism for future crises unveiled on Sunday by the EU had increased the risk of a default by a euro zone country.
Spanish bonds slid by the most since the euro’s launch, and European shares sank 1.4 per cent. The euro slid against 15 of its 16 major counterparts, and the cost of insuring the debt of Spain and Portugal against default hit records.
“The notion that a rescue package for Ireland would create a firewall and stop the fear of contagion is clearly discredited,” said Preston Keat, director of research at Eurasia Group, a political consultancy in London. “Portugal and Spain are already facing pressures in the markets.”
“What you are seeing is a transfer of risk from governments to investors,” said Robert Parker, senior adviser to Credit Suisse.
The focus was on Italy and Spain, two of the euro zone’s largest economies, which are dubbed by some investors as “too big to fail”.
The premium both countries pay for their debt above benchmark German interest rates rose to a fresh high since the introduction of the euro a decade ago.
Italy saw some of the biggest moves of the day as it held a €6.8 billion debt auction but paid half a percentage point more than a month ago.
“The crisis is not abating,” said Alan Wilde, head of fixed income and currency at Baring Asset Management. “The euro is being hit, and Italy has now been drawn in with a big fall in its bond markets for the first time.”
The euro fell 1.1 per cent to $1.31 against the dollar. Equity markets were also hit, with the FTSE Eurofirst 300 down 1.6 per cent and the Dow Jones Industrial Average off 1 per cent.
Italy has the largest amount of debt outstanding in Europe with €1,300 billion, but its centre-right government is on track to trim the budget deficit to 5 per cent by the end of this year.
Markets remain concerned that the troubles of prime minister Silvio Berlusconi could lead to political uncertainty, with repercussions for his austerity programme.
– (Copyright The Financial Times Limited 2010)