European stock markets extended their losses and the euro slid further yesterday as investors sought shelter from strains in the eurozone driven by political upheaval in France and Greece.
Spanish stocks slumped 2.77 per cent to their lowest level since 2003 on concerns about problems in the banking sector after the government said the lenders would have to take increased charges to cover their exposure to a collapsed property market.
On the eurozone bond market, borrowing rates for Spain and Italy rose sharply while Germany attracted safehaven flows, driving its borrowing rate to record lows.
London’s benchmark FTSE 100 index of top companies lost 0.44 per cent to end the day at 5,530.05 points. In Frankfurt, the DAX 30 dropped 0.47 per cent to 6,475.31 points and in Paris the CAC 40 gave up 0.20 per cent to 3,118.65 points amid the threat of a German-Franco spat over an EU fiscal pact.
Madrid’s IBEX-35 leading stock index slumped to 6,812.7 points, the lowest level since July 2003, amid reports that the government was preparing the partial nationalisation of Bankia, Spain’s fourth-biggest listed bank.
The market was also unsettled by reports the government would announce new rules tomorrow obliging banks to boost pro-visions against risky property-related assets.
In foreign exchange deals, the euro dropped to $1.2944 from $1.3005 in New York late on Tuesday. “Markets have continued their weaker tone today as uncertainty in Europe and fears about the solvency of Spanish banks keeps investors on the back foot,” said Michael Hewson, senior analyst at trading group CMC Markets.
“In Greece, the game of high stakes poker between the various politicians striving to form a government and the EU continues to play out in the full glare of the markets,” added Mr Hewson.
In Athens, political parties haggled over the chances of renegotiating a hard-earned rescue package after an election in which voters rejected austerity measures, raising fresh doubts over Greece’s euro-zone membership.
The head of the radical left-wing Syriza party charged with forming a government plans to write to the highly indebted nation’s inter-national lenders telling them that he would renege on its austerity commitments.
In France, pressure was building on president-elect Francois Hollande to stand by the country’s programme to cut the public deficit, with comments to this effect from German Chancellor Angela Merkel and a senior figure at the European Central Bank.
Mr Hollande has promised to reopen talks to ensure the EU fiscal pact focuses on growth rather than simply imposing deficit-cutting austerity rules.
“Given Francois Hollande’s socialist background he would appear to have little in common with Angela Merkel but they will have to find some compromise to ensure that the new French President is able to claim some form of progress after being elected on an anti-austerity platform,” added analyst Hewson.
Capital Economics believes the markets have further to fall, with the FTSE-100 likely to end the year down around four per cent from current levels.