Spain’s borrowing costs soared back to crisis levels after infighting among eurozone countries
Spain’s borrowing costs soared back to crisis levels on Friday after infighting among eurozone countries signalled a return to the turmoil that has rocked the global economy in recent months.
The interest rate on Spanish bonds touched 7%, leaving Madrid on the brink of asking Brussels for a formal bailout, despite having secured a €100bn rescue facility for the country’s banks.
Stock markets plunged and the euro tumbled as investors withdrew funds from the currency zone in favour of safer havens. The euro fell 1% to its lowest level against the dollar since July 2010. Spain’s Ibex index of leading shares was down more than 3%. The German Dax fell almost 2% to 6410 and the French CAC 1.9% lower at 3168. The FTSE dropped 30 points to 5662, while the New York Dow Jones index fell 138 points to 12,719.
A report on the jobs market in the US added to market tensions after it appeared to show the powerhouse of global growth hitting the buffers. The US added only 80,000 jobs last month, well short of the 200,000 average it managed until March and the 400,000 it needs to bring down unemployment.
Christine Lagarde, the boss of the International Monetary Fund, warned that it would lower predictions of global growth in 2012 due to a slowdown in Brazil and China alongside the faltering in the eurozone and US economies.
Without revealing what the IMF would conclude in its next report, Lagarde sounded a warning that the near-term prospects had worsened. “The global growth outlook will be somewhat less than we anticipated just three months ago,” she said. “And even that lower projection will depend on the right policy actions being taken.”
Nouriel Roubini, the economist credited with predicting the 2007 credit crunch, said the poor US jobs report was the third in a row and showed the world’s largest economy was “headed to a stall speed”.
On Thursday, the Bank of England, the European Central Bank and the Chinese authorities cut interest rates or pumped more money into the financial system to prevent a slump that some economists have warned could be a rerun of the 2008 banking collapse.
The Bank of England increased the volume of quantitative easing by £50bn to £375bn after a series of surveys showed that the UK’s double-dip recession could stretch into the autumn.
Leaders from the 17 nations in the euro club reached a deal last weekend to give the ECB greater oversight of the bloc’s banks and to use the eurozone’s rescue funds to reduce countries’ borrowing costs. But after going beyond what many diplomats, finance officials and investors had expected, critical elements were left vague.
The Netherlands and Finland added to the sense of unease after they broke ranks to demand extra collateral in exchange for loans. They said that without the involvement of the eurozone’s main rescue fund, the European Stability Mechanism (ESM), they would need to secure high-grade assets in case countries looking to borrow were unable to pay their debts.
Their message was seen as a clear reference to Spain and Italy, which have avoided using the ESM to rescue their banks.
In a newspaper interview, the Finnish finance minister, Jutta Urpilainen, said that Finland would rather leave the eurozone than pay down the debt of other countries in the currency bloc.
“You have a Finnish problem. You have a Dutch problem. You have a German problem too,” a eurozone diplomat told Reuters, pointing to the reservations of those countries about what was announced at the summit and German chancellor Angela Merkel’s reluctance to help eurozone partners without strict conditions.
Russia confirmed on Friday that Cyprus had asked it for €5bn of financial help. The country is hoping to avoid the harsh terms imposed on other bailed-out eurozone countries. Russia has already loaned the island €2.5bn.
A meeting on Monday of eurozone finance ministers is not expected to resolve the latest disputes and EU diplomats were keen to play down any significant moves to bridge the gulf between states that demand more austerity and those in need of loans.
The meeting’s crowded agenda includes discussing the aid package for Spain’s banks, dealing with the request from Cyprus for EU emergency help, and whether to ease the conditions of Greece’s second bailout.
Germany’s panel of government economic advisers said in a report that key elements of last weekend’s deal were flawed, especially the proposal for a banking union. “The crisis remains unresolved and new escalations threaten if the existing vicious circle of banking crisis, sovereign debt crisis and macroeconomic crisis is not broken,” they said.
“For this reason the panel of experts has presented the government with a report indicating ways to end the sovereign debt crisis and the measures needed to stabilise the banking sector in a sustainable fashion.”
Penny Stock Picks