European markets remained jittery on Thursday after Italy’s record high cost of borrowing renewed fears over the eurozone debt crisis.
After opening lower, markets in Germany and France rebounded to show slight gains in early morning trade, but the UK’s FTSE index was slightly down.
Yields on Italian 10-year bonds were 6.98%, a level seen as unsustainable.
Meanwhile, an auction of Italian one-year bonds saw them pay a yield of 6.087%, up from 3.57% in October.
The full planned amount of 5bn ($6.7bn; £4.2bn) euros was placed, with the yield level, or interest rate, the highest in 14 years.
‘Growth stalled’
Earlier in the day, Japan’s Nikkei index had fallen by 2.9%, South Korea’s Kospi shed 3.8% and Hong Kong’s Hang Seng index dropped 5.3%.
Among the European markets, Germany’s Dax index was up 0.22% at 5,842.16, the French Cac 40 index was 0.4% higher at 3,087.38, while the UK’s FTSE 100 was down 0.5% at 5,434.06.
And there was more bad news for the beleaguered eurozone, as the European Commission cut its forecast economic growth in the area for 2012 to 0.5%, down from a prediction of 1.8% made in the spring,
“Growth has stalled in Europe, and there is a risk of a new recession,” said the Vice-President for Economic and Monetary Affairs, Olli Rehn, in a statement.
The commission predicted that if there was no change in political policy then Italian public debt would remain unchanged at 120.5% of GDP next year, before falling to 118.7% in 2013.
The commission also forecast that next year Greece would see its debt level rise to 198.3% of GDP.
Commenting on the current eurozone crisis, UK Prime Minister David Cameron said that “leaders of the eurozone must act now… the longer they delay the greater the danger”.
Oil issues
The continuing problems in Europe also saw the International Energy Agency cut its forecast for oil demand.
“The ever-present threat of a far-reaching financial collapse from the worsening quagmire in Greece and Italy generated a raft of daily headlines that injected a high level of trading volatility,” it said.
“Market attention has shifted to Italy where a weak financial reform package has triggered a dangerous rise in 10-year government bonds (yields).
“Oil markets are inextricably linked to the deterioration in the European debt situation given the impact on financial markets, the heightened risk of global recession, and the corresponding potential loss of oil demand.”
‘Radical solutions’
The high interest rate on Italian bonds means that if Italy were to borrow money today, with the aim of paying it back in 10 years, it would have to pay an interest rate of just under 7%.
However, Italy has a low growth rate, which means it would be virtually impossible for it to repay what it owes.
Analysts said action needed to be taken in order to calm the markets.
“Europe has moved from a manageable crisis in Greece to a much bigger challenge in Italy,” said Frederic Neumann from HSBC in Hong Kong.
“We need radical solutions at this point to backstop the markets.”
Economists are concerned that the global banking system could still be affected, regardless of whether there is a resolution to the eurozone crisis.
“Whatever they come up with, it doesn’t avoid a European recession,” said Su-Lin Ong at RBC Capital Markets.
“Increasingly, there is a risk that it spills into the banking system and becomes an issue of credit, and the lifeline of economies freezes up again,” she said.
Last month, in an attempt to ease concerns about the Greek debt crisis, eurozone leaders asked banks to raise more capital to protect themselves against any losses resulting from future defaults by Greece.
At the same time, banks also accepted a 50% loss on the money they had lent to Greece.
The fear is that if Italy’s debt crisis worsens, similar measures may have to be taken by banks that are exposed to its debt.
Meanwhile, the euro continued to weaken on Thursday, touching a one-month low of $1.35 against the US dollar, and a two-week low of 105.1 yen against the Japanese currency.
As uncertainty about the outcome of the eurozone debt crisis continues, many investors have been ditching the euro and euro-based assets.
