Falls in bond markets push borrowing costs to new highs
Billions wiped off the value of European banks
Published 19/07/2011 | 05:00
Sharp falls in bond markets and plunging bank shares pushed the borrowing costs of European countries to new highs and wiped billions off the value of the continent's lenders yesterday.
Analysts said prices plunged as investors dumped anything seen as risky in reaction to the lack of political progress on the European debt crisis. Sentiment was also hurt by scepticism of bank stress tests that took little account of the real risk of a euro-area default.
With no appetite for risk, safer assets, including Swiss francs, gold and Canadian securities, got a lift.
Gold was the big news. The price of gold hit a historic high of $1,603 an ounce as investors piled in to the precious metal in an effort to protect wealth amid economic uncertainty.
Gold bullion has gained 8pc in 11 days. It is widely regarded by investors as a safe haven in times of economic turmoil.
Gold is soaring as the euro crisis is matched by an unfolding debt crisis in America, where President Barack Obama and Congress have failed to reach an agreement to raise the $14.3 trillion (€10.15tn) US borrowing limit.
US bonds have held firm despite the crisis, with 100-year yields just 2.9pc, only slightly higher than Germany's 2.68pc. Both countries benefit from any flight to quality.
The rest of the European government debt market was hammered; bond yields for Greece and Ireland hit fresh highs and borrowing costs for Italy and Spain moved back above 6pc.
The yields are rising on fears there will be no progress on solving the eurozone debt crisis at a leaders' summit planned for Thursday. The yield on two-year Greek bonds hit almost 35pc at one stage; Irish two-year yields rose above 22pc.
The latest yields mean Greece would have to pay 34.5pc to borrow in the markets for two years, with investors overwhelmingly unwilling to buy paper even at that return.
Thursday's summit has been called to hammer out agreements on sharing the burden of a second Greek bailout with bondholders, and come up with a wider scheme to restore confidence in the euro area's ability to manage government debt.
Officials are working to at least have a plan on the Greek situation ready for leaders to sign, but there is no indication of a breakthrough.
A deal on Greece has to bridge Germany's desire to see private sector lenders share some of the costs with the ECB's insistence that lender involvement is so slight it is not classed as a default.
The bond markets had not returned to the levels seen a week ago, when calls for an emergency summit first emerged. A rumour that the ECB had intervened to buy bonds last Tuesday had contained yields through the second half of last week.
Yesterday, the ECB announced that it had made no such move. The bank confirmed it was 16 weeks since it bought government bonds.
Analysts said that news pulled the last modicum of support and sent Italian and Spanish bond yields back to record levels.
Shares across Europe plunged and banks were especially hard hit.
The share price of European banks fell below book value for the first time in two years, according to Bloomberg.
It is proof investors set little store in the results of stress tests published on Friday. The Stoxx 600 Index of European bank shares fell 3.2pc to 166.25.