Trichet calls for calm as fear for future of euro grows
The euro dived, government borrowing costs in Ireland, Spain, Portugal and Italy soared and stock markets tumbled across the world yesterday, as fears for the future of the eurozone continued to grip the international markets.
The ECB president Jean-Claude Trichet moved to calm the turmoil saying markets were underestimating the "soundness" of the single currency area and the determination of its member governments to cut debt.
He said the economy was recovering more quickly than expected and that the region's overall deficit remained lower than those of the US and Japan.
"I don't believe that financial stability in the eurozone could really be called into question," Mr Trichet insisted.
He said Ireland and Greece were "solvent but unable to make the requisite adjustments" and needed to get their economies back on track.
He urged all EU countries to back austerity plans in order to revive growth.
Speaking in the EU parliament, he called for calm and considered rhetoric.
In a message clearly intended for Berlin, he said EU policymakers had been guilty of some "communication ambiguity" over the past month on the issue of bondholders sharing in the costs of bank failures.
"Verbal discipline is essential," he said.
"A number of observers were probably underestimating the soundness of the euro area as a whole and the soundness of a number of countries," he said, which he added was down to "perhaps a communication ambiguity".
However, he said a statement from the 16 eurozone finance ministers last Sunday sketching the outlines of a post-2013 rescue fund -- where investors may be called upon to take haircuts under the terms of future bailouts -- was a "useful clarification".
Nevertheless, Europe's sovereign debt hurricane intensified, with the extra premium demanded by investors for purchases of Spanish, Italian and Belgian bonds surging to record highs. Portugal and Spain are now seen as the countries most likely to fall next.
Doubts over the future of the euro pushed it down to $1.30 -- a 10-week low against the dollar. It traded at 83.6p against the pound.
Willem Buiter, chief economist at Citigroup, said the eurozone drama was merely the "opening act" of an expanding crisis in which fears over sovereign defaults could spread beyond Europe to engulf Japan and the US.
European stocks dipped, struggling to halt a sharp three-week sell-off as investors continued to dump banking shares on mounting fears of a domino effect in the eurozone after the bailout on Sunday night.
The ISEQ -- the Irish share index -- closed down nine points to 2,646; the Italian, Portuguese, and Spanish share indexes all closed down sharply. The FTSE 100 slipped 23 points to 5,528 and the price of an ounce of gold, sought as a safe haven asset during market turbulence, rose to $1,389.05.
The urgency of the need to halt the crisis was perhaps most obvious in France yesterday. The French budget minister Francois Baroin was forced to deny the country could face a ratings downgrade from its AAA rating.
The cost of insuring French bonds against default hit more than 1pc for the first time on record. It means it costs €500,000 to insure €10m of bonds against default for five years.
European sources said the ECB was buying governments' bonds in an effort to calm the markets.
Traders said there was little or no chance the fall in bond yields late yesterday afternoon was a result of private sector buyers taking on risk.
Some noted the timing of the ECB action, saying it came just ahead of its monthly press conference tomorrow. The buying also came just ahead of a debt auction due to be held by Spain tomorrow. It will be a crucial test of sentiment.