Drop in confidence plunges euro to its lowest level since January
THE euro fell to its lowest level since January 2011, oil prices plunged and shares dropped as doubts continue to remain about the future of the single currency.
The markets are reacting with growing alarm to fears that the deal hatched at last Friday's European summit will not be enough to end the two-year-old debt crisis.
The price falls worsened after Germany's chancellor urged Europe to stick to austerity and budget discipline as a means of ending the debt crisis, and ruled out the European Central Bank (ECB) being brought into action.
Chancellor Angela Merkel rebuffed pressure on the ECB to intervene decisively to stop the crisis escalating, in a speech to the German parliament.
She said it will take "years, not weeks" to end the debt crisis.
"The German government has always made it clear that the European debt crisis is not to be solved with a single blow. There is no such single blow," she said.
The already weak euro fell faster on the news, and despite an effort by Germany's Chancellor Merkel to repair her damaged relationship with the UK.
As confidence ebbs away, Italy was forced to pay a record price to borrow in the markets, putting further pressure on efforts to come up with a credible near term rescue plan before the eurozone's third largest economy is forced out of the markets.
Italy paid 6.47pc to borrow over five years yesterday. It's the highest since 1997, before the euro was launched in 1999. The price paid is too high to be sustainable over anything but the short term.
The difference in borrowing costs between what the markets think are the safest eurozone borrowers and the rest is at an all-time high.
While Italy's borrowing costs surged, Germany sold a two-year bond at an interest rate of just 0.29pc.
Investors are piling into German debt, seeing it as a "safe haven," even if the euro fails. The popularity is pushing German borrowing costs to an all-time low.
The US paid even less to borrow. An auction of 30-year US bonds saw prices drop to a historic low.
The yield on the 30-year debt was just 2.925pc, the lowest level on record.
The big news in the markets yesterday, however, was around the euro itself.
The euro fell to US$1.2944, the weakest level since January.
The euro also fell against the yen.
The debt crisis has now moved from Europe's banks, to confidence in the weaker euro countries and now to faith in the currency itself.
However, while the latest trend is a concern, the euro is still well above its all-time low.
In 2010, the euro fell to US$1.188, during the early stages of the debt crisis, but recovered to strengthen into 2011 when many investors bet that a fix would be found.
But investors in the money markets are ditching the euro again, on fears that a round of ratings downgrades will undermine the European bailout mechanisms, prompting a fresh episode in the debt crisis.
The AAA rating all agencies give France is seen as especially vulnerable, but no country is now immune from a sovereign downgrade. Stocks fell in the US and Europe yesterday, with French shares the worst hit.
Gold dropped to its lowest level since early October as the weak euro and a shortage of dollar funding near the year-end prompted investors to sell aggressively.