Spooked investors flock to safe haven bonds of US and Britain
MONEY poured into the perceived safe havens of the US, Britain and Germany as fears about the eurozone crisis threatened to turn into panic.
The demand for British and German government bond was so strong that buyers were willing to accept the lowest interest rates ever recorded, at 1.64pc and 1.27pc.
This "yield" was 1.65pc on US government bonds, which was the lowest since March 1946. Governments pay bond owners a fixed sum each year, so the percentage rate depends on the price paid for the bond.
By contrast, investors were demanding a 6.65pc yield if they bought Spanish government bonds. This is close to the levels that forced Greece, Ireland and Portugal to seek loans from the EU and IMF.
The Italian government sold €2.3bn of new bonds, repayable in 2022, at just over 6pc. This would not be regarded as affordable for large-scale borrowings and there was limited demand for the bond.
In total, Italy borrowed €5.73bn from selling 10-year and five-year bonds, but this was less than its maximum target of €6.25bn.
The crux of the euro crisis has now shifted from Greece to Spain. Markets were spooked by the refusal of the European Central Bank to provide capital indirectly to troubled Spanish banks and by confirmation that EU Commission proposals for direct assistance to the banks did not have government backing.
"We may just be approaching the endgame where either the eurozone takes action to stem the bleeding or the whole thing collapses," Gary Jenkins of Swordfish Research told the 'Financial Times' newspaper.
As the crisis deepened, a German government spokesman struck a conciliatory note, saying Berlin will study the proposals made by the commission on joint euro bonds and aid from EU funds for troubled banks, before passing judgment.
"We have to look at the commission's proposal in detail, then we can say what we think about it," Martin Kotthaus, the German Finance Ministry's chief spokesman, said by text message.
The commission yesterday proposed a Europe-wide deposit-guarantee system to reassure bank customers, and said the new permanent bailout fund, the ESM, should be able to inject cash into banks instead of just lending to governments, so that they can rescue banks.
Commission president Jose Barroso defended the proposal, saying "flexibility and speed of action will be of the essence", in what will be taken as a reference to the Spanish crisis.
"We need, not only flexibility in terms of instruments, but also in terms of speed of reaction of the so-called firewalls, in this case of the ESM (European Stability Mechanism)," he said.
(Additional reporting by Bloomberg)