- Euro falls to 11-year low against the yen and 2-year low versus U.S. dollar
- More Spanish regional governments expected to call on central government for help, sparking fears Spain will need full bailout
- By 4pm the Dow was back to only being 78 points down
PUBLISHED: 09:33 EST, 23 July 2012 | UPDATED: 14:53 EST, 23 July 2012
By nearly 4pm much of the drop had recovered and the Dow was back to only being 78 points down.
The significant drop has refueled fears about the stability of the Euro-zone financially and the possibility that Spain may be in need of a formal bailout which came as the Euro reached 11-year lows.
Spain is the epicenter of the current bout of fears, with investors increasingly concerned that the country will not be able to turn its public finances around without outside help.
A ban on short-selling by Italy and Spain- whereby investors are prohibited from selling stocks they don’t already own – helped contain the fallout on the Milan and Madrid exchanges but did little to encourage traders elsewhere.
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The catalyst to the day’s dramatic falls was the sharp increase in the yield on Spain’s benchmark 10-year bond to well above 7 per cent. If it remains around that level, investors believe the eurozone’s fourth-largest economy will likely need a financial rescue like Greece, Ireland and Portugal.
Markets went into crisis mode this morning after the Spanish region of Murcia yesterday went to the central government for a bailout – following Valencia, which took the same step on Friday.
With fears that more regions will follow and tip Spain into effective bankruptcy, the cost of borrowing for the Spanish government soared and that sent the FTSE 100 index of leading shares plunging 107.7 points or 1.9 per cent to 5,544.1.
The fall follows a 1.1 per cent loss for the Footsie on Friday, and the euro also took a hammering overnight, falling to its lowest level versus the yen since November 2000, at 94.37.
With traders anticipating a fully-fledged bailout for Spain, the yield on Spanish 10-year bonds shot up a further 30 basis points to a crisis level of 7.59 per cent and two-year yields were up almost 90 points at 6.64 per cent, while Spain’s Ibex stock index tumbled almost 6 per cent, its worst fall in two years.
Germany’s Dax and France’s Cac 40 indices were also down 1.6-1.9 per cent.
‘Greece is not far from leaving the euro which is not as big a deal as it was one year ago, but Spain was not as much a worry a year ago and is an enormously big deal today,’ said Lex van Dam, hedge fund manager at Hampstead Capital.
Against the dollar, the euro sank below $1.2100 for the first time in more than two years, hitting a low of $1.2093 and creeping ever closer to the 2010 trough of $1.1876.
Although sterling lost a little ground against the single currency today, it stands close to four-year highs at more than €1.28 to the pound.
‘With such strong risk aversion it is the yen and the dollar that will keep gaining against risk currencies,’ said Teppei Ino, currency analyst at the Bank of Tokyo-Mitsubishi UFJ in Tokyo. ‘The Spanish scenario has not been priced in yet.’
Officials from the European Union, European Central Bank and International Monetary Fund will meet today with the Greek government government to discuss progress with its budget pledges.
If Greece is unable to deliver the spending cuts and tax reforms necessary then the so-called troika are unlikely to be forthcoming with further aid and a Greek exit from the single currency bloc will be back on the cards.
Over the weekend, the Spanish region of Murcia said it would seek government financial assistance, and media reported that half a dozen other regional governments were ready to follow in the footsteps of Valencia, which on Friday asked for help from a new rescue fund.
European Central Bank President Mario Draghi tried to quell fears that the eurozone is spiralling back into crisis, with a statement that the euro is ‘irreversible’ and that there is no danger of the single currency bloc breaking up.
The ECB president went even further to suggest that, far from collapsing, the eurozone is set to become even stronger and more integrated.
Speaking in an interview with French newspaper Le Monde on Saturday, Mr Draghi dismissed some analysts’ worse case scenarios for the euro. ‘We see analysts imagining the scenario of a eurozone blow-up,’ he said.
‘They don’t recognise the political capital that our leaders have invested in this union and Europeans’ support.
Mr Draghi went on to say that in the long term, greater integration will be necessary among eurozone countries, saying that movement towards ‘financial, budgetary and political union’ is ‘inevitable’.
European leaders took a step towards greater integration last month at a Brussels summit where they agreed to put the ECB in charge of supervising banks and gave the ESM rescue fund the power to recapitalise troubled banks.
But Spain’s borrowing costs have remained stubbornly high despite the approval last of the £80billion rescue package for its beleaguered banks.
Stock markets across Asia were also hit overnight, with Japan’s Nikkei 225 index losing 1.9 per cent, South Korea’s Kospi falling 1.8 per cent and Australia’s ASX 200 index shedding 1.7 per cent.
The outlook for the UK economy was little better, with the Government braced for official data on Wednesday that is expected to confirm the UK has failed to climb out of recession amid calls from London Mayor Boris Johnson that ministers do more to boost confidence and growth.
Gross domestic product figures for the period between April and June, published on Wednesday, are expected to show that the double-dip recession has persisted. The economy entered a technical recession in the first quarter of 2012, with gross domestic product declining by 0.3 per cent after a 0.4 per cent drop in the final quarter of 2011.
Philip Shaw, an economist at brokers Investec, forecast a further slump in output of around 0.4 per cent.
The gloomy picture provoked Mr Johnson to launch an outspoken attack yesterday on David Cameron and George Osborne’s handling of the economy – demanding action to boost public confidence and growth.
VIDEO: Markets are taking a beating…