Monday, May 23, 2011

Euro contagion fears hit Spain and Italy

The euro and the Spanish and Italian bond markets came under pressure on Monday amid growing investor fears that the problems of Greece are hitting the bigger economies of Europe's single currency.

The euro fell to record lows against the Swiss franc and two-month lows against the dollar, while Spain's cost of borrowing for 10-year debt rose to highs last seen in September 2000. Italian 10-year bond yields also jumped.

Worries over contagion spread to Europe's equity markets, with stocks in Italy the biggest fallers down 3.3 per cent. Wall Street was affected too with the S&P 500 closing down 1.2 per cent.

John Wraith, fixed income strategist at BofA Merrill Lynch, said contagion was spreading to the bigger eurozone economies. "It is like a group of climbers roped together. As Greece slips, it pulls down other countries such as Spain and Italy."

Spanish bonds were hit by the poor performance of the ruling Socialists in regional elections. Miguel Angel Fernández Ordóñez, the governor of the Bank of Spain, said the country should not accept the high cost of financing sovereign debt and must press ahead with its economic reforms.

The extra cost Spain pays above Germany to borrow over 10 years has jumped to 2.48 percentage points. (read more)