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Tuesday, 10 April 2012

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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

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