Global stock markets posted sharp declines yesterday and the euro dropped to a 22-month low against the dollar on growing concern over a potential Spanish bailout.
European bond rates were also under pressure with those for Spain reaching danger levels on the secondary market and Italy missing its maximum target in a bond sale.
When trading wrapped up, London’s benchmark FTSE 100 index had given up 1.74 per cent to 5,297.28 points.
In Frankfurt, the DAX 30 was 1.81 per cent lower at 6,280.80 points, while in Paris the CAC 40 was down by 2.24 per cent at 3,015.58 points.
Madrid’s IBEX 35 index plunged by 2.58 per cent to a nine-year low of 6,090.40 points as the interest rate on Spanish 10-year government bonds hit 6.703 per cent – which is unsustainable over the longer term.
The European single currency settled at $1.2403 after falling as low as $1.2386 – a level last seen on July 1, 2010.
US stocks also slumped as the yield on the US Treasury’s 10-year bond hit a record low as investors sought safety from Europe’s troubles.
In midday trade, the Dow Jones Industrial Average was down by 1.24 per cent, the S&P 500 index fell 1.40 per cent, while the tech-rich Nasdaq dropped 1.28 per cent.
In Asia, Hong Kong stocks tumbled 1.92 per cent and Tokyo fell 0.28 per cent.
“Today’s market movement has all the makings of a bloodbath unless policymakers pull a rabbit out of the hat,” commented CMC Markets analyst Michael Hewson.
“This can’t go on until the Greek elections,” scheduled for June 17, he added. “EU policymakers appear to be doing their best impersonation of a load of rabbits caught in headlights.”
German 10-year borrowing rates fell to a record low and the gap with the interest rate which Spain must pay widened to a record as well.
The eurozone bond market was under rising pressure from concern about public finances and the banking system in Spain.
The 10-year rate on the German Bund, a safe haven for institutional investors, fell to 1.283 per cent and the gap or risk premium for Spain rose to 5.32 percentage points.
Madrid’s economic woes were back in focus as its 10-year borrowing rates approached the 7.0-percent mark that hasbeen described by analysts as a “tipping point”.
Economists fear the Spanish government will have to seek an international bailout – following Greece, Ireland and Portugal – despite assurances from Prime Minister Mariano Rajoy.
Under pressure from concerns about the Spanish banking system, Italy had to pay higher rates in a bond auction of five- and ten-year debt.
“Investors remain cautious as the next three weeks remain crucial for the future of the European monetary union,” said Annalisa Piazza, strategist at Newedge in Milan.