(Update) Britain’s FTSE 100 fell on Thursday after fears over the eurozone’s ability to prevent its debt crisis from engulfing Italy swept through global markets, even as the country’s borrowing costs eased.
The yield, or implied interest rate, on Italian 10-year government bonds dropped 22 basis points to 6.99%, half a percentage point lower than the euro-era peak of 7.5% it hit on Wednesday.
The falls came amid rumours that the European Central Bank was buying short-term Italian debt and as Mario Monti, former European commissioner, emerged as favourite to replace departing prime minister Silvio Berlusconi and stem the sharp rise in bond yields.
Greece, Ireland and Portugal were all forced to seek bailouts after their borrowing costs breached 7% – yet Italy, with its €1.9 trillion (£1.6 trillion) debt market, is believed to be too big to bail out.
Italy also paid a 6.087% yield at a one-year debt auction on Thursday morning, the most in 14 years. However, it placed the full planned amount of €5 billion.
‘Although we are in a very serious situation at the moment, with an Italian default being catastrophic for the global economy, it would be foolish to forget countries such as Spain,’ warned Simon Furlong at Spreadex, as the country’s 10-year borrowing costs neared 6%.
‘European leaders seem to be losing their grip on this crisis,’ he added. ‘The dam is cracked, but does Europe know how to fix it before it is too late?’
The UK index of blue-chip shares faded 0.48%, or 26 points, to 5,434 and the All Share index dropped 0.48%, or 13 points, to 2,802.
Other stock markets in Europe erased early losses as Italian bond yields dropped: Germany’s DAX index recovered 1.23% to 5,901 and France's CAC 40 index inched up 0.37% to 3,085; but the FTSEurofirst 300 index of top European shares was 0.03% lower at 966.
Although lawmakers in Italy were attempting to ram through economic reforms in the coming days, the country would ‘be unable to succeed with a self-help plan’, according to analysts at Espirito Santo Investment Bank. And the European Central Bank is increasingly seen as the only body that can provide a viable short term solution.
‘We would suggest that the crisis is approaching “another” point of no return,’ warned Gerard Lane, equity strategist at Shore Capital.
Given that markets are apparently unwilling to finance the rollover of Italian debt, he continued, the ECB may shift its opposition to quantitative easing, or printing money on a massive scale to buy government bonds. ‘The alternatives maybe worse than the loss of face to the climb down from the ideological position the ECB has held up to now,’ Lane said.
Vedanta Resources (VED.L) was among the biggest fallers on the FTSE 100, giving up 59p to £11.91, after reporting a 92% fall in first-half net profit.
Elsewhere, Howden Joinery (HWDN.L) sank 7p to 107p as Panmure Gordon cut the kitchen supplier to ‘hold’ from ‘buy’ in the wake of first-half results, and Cookson Group (CKSN.L) lost 21p to 440p after posting weaker second-half performance.
Sterling was flat against the dollar at $1.592 ahead of a key Bank of England policy decision, and edged down 0.35% versus the euro to €1.171.