Italian bond yields soar as strikes raise doubts over Monti's austerity cuts
Confidence fades in latest eurozone fix as all of Italy's unions strike over where €20bn cuts will fall, France faces rating cut and fears grow that Germany's Commerzbank might need a bailout
Phillip Inman, economics correspondent
Guardian.co.uk,
Italy's government of technocrats was under intense pressure tonight to confront workers involved in a wave of strikes after financial markets drove the cost of state borrowing to crisis levels and confidence in the European Union's plan to fix the euro crisis began to evaporate.
The Italian prime minister, Mario Monti, said negotiations on Sunday had failed to resolve differences over how to implement €20bn (£17bn) of spending cuts and tax rises, triggering a wave of strikes by all three of the country's union federations.
The benchmark 10-year Italian bond yield surged to 6.79% as investors voiced their concerns over Rome's ability to push through austerity measures without greater support from the rest of the eurozone and the European Central Bank. A level of 7% is seen as unsustainable for a country with Italy's massive debts.
Last week's Brussels summit agreed to press ahead with consolidating fiscal policies to ensure all member states met agreed borrowing and spending limits. But the credit-ratings agency Moody's said the summit offered "few new measures" to deal with the eurozone's sovereign debt crisis.
"The absence of measures to stabilise the credit markets over the short term means that the euro area, and the wider EU, remain prone to further shocks and the cohesion of the euro area [remains] under continued threat," the agency said in a statement.
Standard & Poor's is expected to strip France of its AAA rating within days following a review that found the country's leading banks had made large loans to Italy, Spain, Greece and Ireland.
France's President Nicolas Sarkozy said that if France lost its AAA credit rating, it would be "one more difficulty, but not insurmountable".
"If they withdrew it, we would face the situation with sang-froid and calm," he told Le Monde newspaper.
Speculation that Germany's second largest bank, Commerzbank, is under financial pressure following a lending spree to indebted countries, were also circulating among traders. The bank is expected to need a rescue bailout by the Berlin authorities to prevent its collapse.
In London, the FTSE fell 1.8% to 5,427, while the Dow Jones index in New York fell almost 2% to 11,948 by the time London had closed. The Frankfurt Dax and Paris Cac both fell more than 2% as investors digested a report that argued the eurozone and the UK were heading into a deeper recession than previously forecast.
Gerard Lyons, chief economist at Standard Chartered bank and one of the most accurate forecasters in City, warned that the eurozone would contract next year by 1.5%, while the UK would shrink by 1.3%.
Lyons said that "the mounting crisis" in advanced economies, especially the eurozone, meant the outlook was increasingly gloomy.
The bank warns of a "triple shock" to the west starting with a confidence crisis, then a consumer spending boycott and a business investment squeeze that will lead to a credit crunch in the banking sector and national governments tightening budgets all over Europe.
Monti, who has appointed a cabinet of experts to run Italy following Silvio Berlusconi's resignation, said there was room for further negotiation to head off strikes that affected ports, highways and hauliers on Monday and were expected to shut the main banks by the end of the week.
Spain's new right-wing government was also under pressure after Spanish bond yields also began to climb. Bond yields reflect the cost of borrowing for nations and corporations. In the case of Spain and Italy, they have climbed sharply since June ahead of an escalation in the Greek debt crisis.
The Italian prime minister, Mario Monti, said negotiations on Sunday had failed to resolve differences over how to implement €20bn (£17bn) of spending cuts and tax rises, triggering a wave of strikes by all three of the country's union federations.
The benchmark 10-year Italian bond yield surged to 6.79% as investors voiced their concerns over Rome's ability to push through austerity measures without greater support from the rest of the eurozone and the European Central Bank. A level of 7% is seen as unsustainable for a country with Italy's massive debts.
Last week's Brussels summit agreed to press ahead with consolidating fiscal policies to ensure all member states met agreed borrowing and spending limits. But the credit-ratings agency Moody's said the summit offered "few new measures" to deal with the eurozone's sovereign debt crisis.
"The absence of measures to stabilise the credit markets over the short term means that the euro area, and the wider EU, remain prone to further shocks and the cohesion of the euro area [remains] under continued threat," the agency said in a statement.
Standard & Poor's is expected to strip France of its AAA rating within days following a review that found the country's leading banks had made large loans to Italy, Spain, Greece and Ireland.
France's President Nicolas Sarkozy said that if France lost its AAA credit rating, it would be "one more difficulty, but not insurmountable".
"If they withdrew it, we would face the situation with sang-froid and calm," he told Le Monde newspaper.
Speculation that Germany's second largest bank, Commerzbank, is under financial pressure following a lending spree to indebted countries, were also circulating among traders. The bank is expected to need a rescue bailout by the Berlin authorities to prevent its collapse.
In London, the FTSE fell 1.8% to 5,427, while the Dow Jones index in New York fell almost 2% to 11,948 by the time London had closed. The Frankfurt Dax and Paris Cac both fell more than 2% as investors digested a report that argued the eurozone and the UK were heading into a deeper recession than previously forecast.
Gerard Lyons, chief economist at Standard Chartered bank and one of the most accurate forecasters in City, warned that the eurozone would contract next year by 1.5%, while the UK would shrink by 1.3%.
Lyons said that "the mounting crisis" in advanced economies, especially the eurozone, meant the outlook was increasingly gloomy.
The bank warns of a "triple shock" to the west starting with a confidence crisis, then a consumer spending boycott and a business investment squeeze that will lead to a credit crunch in the banking sector and national governments tightening budgets all over Europe.
Monti, who has appointed a cabinet of experts to run Italy following Silvio Berlusconi's resignation, said there was room for further negotiation to head off strikes that affected ports, highways and hauliers on Monday and were expected to shut the main banks by the end of the week.
Spain's new right-wing government was also under pressure after Spanish bond yields also began to climb. Bond yields reflect the cost of borrowing for nations and corporations. In the case of Spain and Italy, they have climbed sharply since June ahead of an escalation in the Greek debt crisis.
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