Investors take refuge in 'safe' German bonds as fears spread
France and Spain come under heavy fire in global markets as confidence in eurozone's ability to solve problems sinks
FEARS of contagion in Europe's core were realised yesterday as the difference in yields between German bonds and the bonds issued by France, Belgium, Spain and Austria climbed to euro-era records.
France and Spain came under particularly heavy fire as the global crisis finally dug its fangs into the eurozone's second and fourth biggest economies.
"It's a confidence crisis," said Elwin de Groot, a senior market economist at Rabobank Nederland.
"Investors have no confidence that the eurozone can solve its problems. They will look for the most safe place they can store their money, which is Germany. Everything else is suffering."
The yield on French 10-year bonds was 3.67pc yesterday evening.
French 10-year bond yields have risen around 50 basis points in the last week, pushing the spread over safe haven German bonds to a euro-era high of 173 basis points.
French banks are among the biggest holders of Italy's €1.8 trillion public debt pile. The yield on Spanish 10-year bonds was 6.3pc while the yield on Irish bonds was 7.76pc.
Italy's 10-year yield rose above 7pc as prime minister-in-waiting Mario Monti wrapped up talks on forming a new government after two days.
Mr Monti said yesterday evening he was "convinced" the country could overcome the current crisis as he prepared to meet with President Giorgio Napolitano today to present his new government.
Two days of talks seeking support from political parties, unions and employers were "intense and useful", Mr Monti said.
Italy's 7pc yield continues to haunt the markets in spite of Mr Monti's optimism.
Ireland began talks to receive aid in November last year, three weeks after its 10-year yield breached 7pc. Portugal asked for help in April, three months after its borrowing costs jumped past that level. Greek yields also breached 7pc before it gained aid in April 2010.
Despite the turmoil in the global bond markets, Finance Minister Michael Noonan told the Dail yesterday afternoon that Ireland still expected to test the bond markets next year.
Equities and the euro also fell yesterday. The Stoxx Europe 600 Index of equities slid 0.6pc and the euro weakened 0.9pc to $1.3508.
In New York, US stock index futures fell sharply yesterday morning after the rise in European bond yields, the drop caused by fears in the United States that Europe's debt crisis was mushrooming into a wider systemic problem.
US President Barack Obama's top economic adviser said the European debt crisis was the leading risk to the US recovery.
"Clearly, Europe is a tremendous concern," Alan Krueger, chairman of the White House Council of Economic Advisers, said. "It is important they act quickly, because it is a threat not only to Europe and the US, but the world as a whole."
In Athens, Greek conservatives set themselves on a collision course with the European Commission, refusing its demand to sign a pledge to meet the terms of a bailout after an election.
Dutch Prime Minister Mark Rutte called for the possibility of euro members to be expelled from the currency group, a day after German Chancellor Angela Merkel's Christian Democratic Union party voted to allow euro states to quit the bloc.
"We would like countries to be able to be pushed out of the eurozone," Mr Rutte said at a news conference in London, adding this would be a last resort.
(Additional reporting Bloomberg and Reuters)