Eurozone fears revive to drag down markets
Shares in the City suffered their biggest fall in more than four
months today as global financial markets were unnerved by a fresh
flare-up in Europe's debt crisis and hints that America's central bank
is reluctant to pump more cash into the world's biggest economy.
Garment employees sewing apparels for European market |
Ignoring the upbeat UK economic news, London's benchmark FTSE 100
index took its cue from jittery European bourses and closed 134.57
points lower at 5703.8, a drop of 2.3%. In America, the Dow Jones
industrial average closed down 124.80, a fall of just below 0.95%, at
13074.75.
Markets had opened lower after the minutes of the US Federal
Reserve's policy-making committee appeared to rule out a third bout of
quantitative easing, the programme of bond purchases by the central bank
that has twice before boosted the American money supply.
The mood further darkened on news of a deepening slump in the
eurozone's services sector, which was shortly followed by a
disappointing bond auction in Spain.
Amid growing concerns that the respite from the debt crisis provided
over the past four months by the European Central Bank (ECB) is coming
to an end, Spanish 10-year bond yields rose by more than 0.25 points to
5.7%, after the government in Madrid struggled to sell new issues of
debt.
Spain sold 2.6 bilion of bonds, at the low end of the government's
target range and, to placate fears that it might eventually become the
fourth eurozone country to require an international bailout, had to
offer investors an interest rate of 5.338% on debt maturing in 2020.
This was higher than the 5.2% forecast and the 5.156% offered when the
debt was last sold in September 2011.
Spanish economy minister Luis de Guindos admitted on Wednesday that
the biggest risk facing the country was the belief that Madrid would not
be able to bring down its budget deficit. In an interview with Reuters,
de Guindos said Madrid was determined to reduce the budget deficit to
5.3% of national output in 2012 and to the European Union ceiling of 3%
in 2013.
“The main negative effect, the main risk for the Spanish economy, is
the perception that public accounts are not sustainable ... the 5.3%
commitment is very important but the 3% commitment is very, very
important,” he said.
The ECB kept its key interest rate unchanged at 1% on Wednesday, with
the bank's president, Mario Draghi, publicly resisting German pressure
to begin preparing an exit strategy from the emergency funding
operations that have been used to support Europe's banks.
Since the late autumn, the ECB has announced two long-term
refinancing operations in an attempt to provide cheap credit for banks
struggling to obtain credit, but the president of the German Bundesbank,
Jens Weidmann, has expressed concerns that the “wall of money” released
by Draghi will lead to higher inflation. After a survey showed the
eurozone's services sector moving deeper into recession last month,
Draghi said: “Given the present conditions of output and unemployment,
which is at a historical high, any exit strategy, talking for the time
being, is premature.” He added bluntly: “I think the president of the
ECB is the one who has the last word on this.” Draghi said the bank had
not discussed changing interest rates, although some analysts believe a
double-dip recession in the eurozone will lead to lower borrowing costs
later this year. Draghi also sought to reassure the Bundesbank that the
ECB was not going soft on inflation.
“All our non-standard policy measures are temporary in nature,” he
told the regular post-meeting news conference. “All the necessary tools
are available to address upside risks to medium-term price stability in
a firm and timely manner.”
This rise showed financial markets expected governments on the
eurozone periphery to deliver reforms, Draghi said, putting pressure on
those countries to shape up rather than looking to the ECB to act
further. “Markets are asking these governments to deliver,” he said.
Following the falls in Europe, shares on Wall Street were down by 1% in
morning trading, while the price of crude oil fell to $124 a barrel. The
eurozone economy shrank 0.3% in the fourth quarter and indicators for
future growth remained weak, raising the likelihood that the economy
shrank again in the first quarter.
Unemployment is at a record 10.8% for the 17 eurozone countries,
while youth unemployment has reached unprecedented levels of 50% in
Spain and Greece. Annual inflation of 2.6% remains stubbornly above its
2% target. The ECB blames higher oil prices rather than inflationary
pressures from the economy.
AFP |