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Markets shrug off Greek relief as fears for the euro resurface

No bright new dawn for single currency -- yields on Spanish and Italian bonds reach new heights

SPANISH and Italian bond yields shot up yesterday as market fears over the future of the eurozone came flooding back, swamping early relief over the weekend's election result in Greece.

Yields for 10-year bonds on debt issued by Madrid surged to their highest levels in the history of the single currency, touching 7.28pc, before falling back to 7.16pc.

Italy's 10-year bond yields also jumped above 6pc, ending at 6.09pc. Yields above 7pc are widely believed to be unsustainable.

The yield spike prompted the Spanish Treasury minister, Cristobal Montoro, to call for capital market intervention from the European Central Bank.

Investors had drawn a sigh of relief at the Greek result, but stressed that the underlying crisis afflicting the single currency had still not been solved.

"While Greek euro-exit fears have eased, this outcome does little to alleviate the weak fundamentals that currently weigh on Spain and Italy," said Michala Marcussen of Societe Generale.

Others said policymakers were still doing too little.

"There is also no sign yet of the collective political will to take the tough decisions required to implement a long-term strategy to resolve the crisis," said Mike Turner, the head of Global Strategy & Asset Allocation at Aberdeen Asset Management.

European leaders sent out conflicting signals over how they might respond to the latest downward lurch in the crisis.

A suggestion from the German foreign minister, Guido Westerwelle, that Europe was preparing to relax the conditions of Greece's bailout in response to Sunday's election result, was swiftly denied.

Mr Westerwelle had told German radio that Greece's political standstill over the past month had inevitably thrown Athens' deficit-reduction plans off schedule.

"We are ready to talk about the timeframe as we can't ignore the lost weeks" he said.

But government sources in Berlin contradicted this, saying that the programme would not change.

This hard line was reiterated by the German Chancellor, Angela Merkel, who insisted in Los Cabos Mexico -- where G20 leaders are meeting -- that there would be no loosening of Greece's reform conditions.

A leaked draft of the Mexico G20 communique, which showed leaders pledging to tackle budget deficits and restore growth, failed to lift sentiment in the financial markets. The euro fell to $1.2560.

Asian stock markets had responded positively to the Greek election result, which seemed to raise the chances of the country remaining in the single currency.

The Nikkei Index rose by 1.77pc and Hong Kong's Hang Seng by 1.01pc. But the rally did not continue in Europe, where Spain's Ibex shed 2.96pc, Italy's main equity index lost 2.85pc and France's CAC fell by 0.8pc.

Bank shares were the biggest losers. Spain's Bankia lost 9pc of its value, Germany's Commerzbank shed 3.6pc and France's BNP lost 3.3pc. The UK's Royal Bank of Scotland was down 4.97pc.

Commodities markets also fell in response to fears that that the unresolved eurozone crisis would undermine global demand for energy.

Brent crude futures fell by $2, having bounced slightly overnight on the Greek result.

Irish Independent