Hugo Duncan, Becky Barrow – Daily Mail July 23, 2012
Analysts warn recession-ravaged Spain is on the brink of financial disaster
Fears panic will spread to Italy and tear the eurozone apart
FTSE 100 index of leading shares down 2% as Spain bans short-selling of shares to stem stock market losses
French and German markets down 3%
Italy heads towards bail-out with nearly £1trillion public debt
More Spanish regional governments expected to call on central government for help, sparking fears Spain will need full bail-out
Analysts warned that the recession-ravaged country was on the brink of a financial disaster that could see panic spread to Italy and tear the eurozone apart.
It came as factory output in Germany and France fell at the fastest rate for more than three years – a worrying sign that the crisis is taking its toll on the region’s two biggest economies.
The euro tumbled against the pound and shares from Madrid to Milan slammed into reverse on another bleak day for investors in Europe.
‘At the moment all eyes are on the eurozone as it continues to lurch from one catastrophe to the next,’ said Mike McCudden, an analyst at online stock broker Interactive Investor.
The authorities in London are growing increasingly worried about the impact of the single currency meltdown on British banks and the UK economy.
Lord Turner, chairman of the Financial Services Authority, said: ‘My main worry is that I go to bed thinking: “Have I not spent enough time today thinking about the eurozone?”
The problems have not gone away. They are very serious problems. And the most important thing is that the eurozone cannot hang around.
We have got to cut the fatal loop between sovereigns and banks which will otherwise bring the eurozone project as it is now down.’
Spain’s crucial 10-year bond yield – the interest rate the government pays to borrow and a key indicator of a country’s financial health – hit a new euro-era high of 7.6 per cent.
That is deep in the danger zone and well above the seven per cent level that triggered bailouts in Greece, Ireland and Portugal. Cyprus has also been forced to beg for help because of its broken banking system.
The alarming surge in Spanish debt costs has banished any hopes that recent efforts to calm the storm in the region have helped.
Spain last month secured a £78 billion rescue for a banking system crippled by a spectacular property crash and recession and the highest rate of unemployment in Europe.
But with the country’s regions in financial disarray and in need of help from Madrid, it is feared a full-blown state bailout will now be required.
Borrowing costs in Italy also soared as the financial markets bet that it will be the next domino to fall.
The Italian 10-year bond yield was back above 6.5 per cent for the first time since January.
You are getting to that tipping point where it seems there is just a complete lack of confidence in Spain’s ability to fund itself and the market has basically given up on it,’ said Gary Jenkins, a director at City analysts Swordfish Research.
The market is just saying Spain is a done deal, they are going to need a proper full bailout. The danger is if Spain requires a bailout, the market will say Italy is next. And if that happens you have a major problem.’
Europe can ill-afford to rescue Spain – the fourth largest economy in the single currency bloc – and Italy is widely seen as too big to save.
On Monday night, international ratings agency Moody’s threatened to strip Germany, the Netherlands and Luxembourg of their coveted AAA credit scores because of the cost of picking up the tab for the rest of the eurozone.
The euro fell half a per cent against sterling yesterday, sending the pound up to 1.2860 euros, its highest level for nearly four years.
The FTSE 100 index fell 34.64 points to 5499.23 in London having suffered a near 120 point fall the previous day. Shares in Madrid were down 3.6 per cent while the stock market in Milan lost 2.7 per cent of its value.
A survey by research group Markit showed the private sector in the eurozone contracted for a sixth month in a row in July as the region plunged into recession.
German and French manufacturers were badly hit as the crisis spread from the periphery to the core.
Chris Williamson, chief economist at Markit, said: ‘There is a pretty clear picture in Germany of conditions really deteriorating markedly, especially in manufacturing, and that’s a symptom of domestic and export demand continuing to falter.
Germany is now contracting at the steepest rate for three years while the rate of decline in the periphery is also among the highest seen since mid-2009.’