Traders study charts at the stock exchange in Madrid. Photograph: Andrea Comas/Reuters
A rally in financial markets at the result of Greece's election lasted barely an hour amid growing fears that Europe's worsening debt crisis was about to engulf Spain.
Interest rates on Spain's debt rose sharply to hit 7.26% at one point as relief at the possibility of a pro-austerity government being formed in Athens quickly faded.
Dealers quickly had second thoughts about the impact of the second Greek poll in two months, selling shares and driving up bond yields in anticipation that Spain will become the fourth eurozone country to require a full-scale bailout from the European Union and the International Monetary Fund.
Share prices in Spain and Italy – the two countries seen as most vulnerable to contagion from Greece – fell 3%, while an early rise in the City fizzled out to leave the FTSE 100 just 12 points higher at 5491. Interest rates on Spain's borrowing are at levels that forced Greece, Ireland and Portugal to seek outside financial assistance, and in a day of nervous trading, risk-averse investors sought out the traditional safe havens of the Swiss franc and German bonds.
Stephen Lewis, of Monument Securities, said: "The Greek election result averts the most immediately alarming scenarios for the eurozone but makes no fundamental change in the medium term outlook."
Markets have become increasingly concerned in recent weeks that the austerity programmes in the eurozone are causing a vicious circle of recession and higher levels of debt. One analyst said Greece's problems were so intractable that a new pro-austerity government was unlikely to remain in office until the end of the year.
Graham Turner, of GFC Economics, said: "By common consent, there will be another election within six months, when Syriza is widely expected to take control. However, whoever governs Greece will be faced with a similar compelling logic. A second debt restructuring will be required to keep Greece within the single currency."
The Greek election provided a sombre backdrop to the gathering of developed and developing nations at the G20 summit in Mexico but the inability of previous summits to resolve the debt crisis meant markets were sceptical about the outcome. Instead, the immediate focus was on whether Madrid would be able to sell up to €5bn (£4bn) of bonds in two debt auctions this week, starting with one on Tuesday.
Markets were left confused by the mixed messages from European capitals, with Berlin first seeming to be willing to grant Greece more time to put its public finances in order then pouring cold water on the idea. Discussions between Athens and its European creditors will begin as soon as a new national unity government is formed.
Ben May, European economist at Capital Economics, said the result in Greece, which left the centre-right New Democracy party with most seats in the new parliament, was the best realistic outcome from an election in which markets had predicted immediate mayhem had victory gone to the anti-austerity Syriza coalition. He added, however, that Greece could still be forced out of the single currency by the end of the year.
"What's more, policymakers will need to take much greater action, perhaps including significant steps towards full fiscal and banking union, to prevent a bigger, more damaging form of break-up."
Neil MacKinnon, a VTB Capital analyst, noted that Greece "remains in a debt trap and the economy is still stuck in a depression." He concluded "ultimately, the scenario of a Greek exit from monetary union remains in place."
Reports from Dublin said that the Irish government, praised by European policymakers for its willingness to adopt tough austerity measures, will get more time to pay back the €85bn it has borrowed from Europe and the IMF. Under the terms of its bailout, Dublin is supposed to clear its debt within 15 years but the likelihood that much of the 17-nation eurozone will soon be back in recession has prompted a rethink that may see Ireland's loan repayment period extended to 30 years.
Oil prices fell sharply on expectation that the eurozone crisis will lead to weaker global demand. A barrel of Brent crude was trading at just over $96 a barrel, more than $30 down on its recent peak in March. Germany's DAX closed 0.3% higher at 6,248.20, France's CAC-40 fell 0.7% to 3,066.19, while the Dow Jones industrial average in New York was down 14 points in afternoon trading. Interest rates on Italy's 10-year bonds rose to just over 6%, prompting a call from the shadow chancellor, Ed Balls, that urgent action was needed to prevent a domino effect across Europe.
Writing in the London Evening Standard, Balls said: "The eurozone must admit that muddling through, patching up bank vulnerabilities, country by country, while sticking to the ideology of austerity has failed and is now building to a catastrophe." Balls said there needed to be a recapitalisation of troubled banks and a role for the European Central Bank as a lender of last resort in order to restore confidence in the financial markets.
"That deep uncertainty is why last week's bailout of Spanish banks has not restored confidence. And it is why, without a proper firewall to stop contagion spreading to other troubled economies such as Spain and Italy, a disorderly Greek exit would be catastrophic not only for Greece but for the rest of Europe and the world economy."
Interest rates on Spain's debt rose sharply to hit 7.26% at one point as relief at the possibility of a pro-austerity government being formed in Athens quickly faded.
Dealers quickly had second thoughts about the impact of the second Greek poll in two months, selling shares and driving up bond yields in anticipation that Spain will become the fourth eurozone country to require a full-scale bailout from the European Union and the International Monetary Fund.
Share prices in Spain and Italy – the two countries seen as most vulnerable to contagion from Greece – fell 3%, while an early rise in the City fizzled out to leave the FTSE 100 just 12 points higher at 5491. Interest rates on Spain's borrowing are at levels that forced Greece, Ireland and Portugal to seek outside financial assistance, and in a day of nervous trading, risk-averse investors sought out the traditional safe havens of the Swiss franc and German bonds.
Stephen Lewis, of Monument Securities, said: "The Greek election result averts the most immediately alarming scenarios for the eurozone but makes no fundamental change in the medium term outlook."
Markets have become increasingly concerned in recent weeks that the austerity programmes in the eurozone are causing a vicious circle of recession and higher levels of debt. One analyst said Greece's problems were so intractable that a new pro-austerity government was unlikely to remain in office until the end of the year.
Graham Turner, of GFC Economics, said: "By common consent, there will be another election within six months, when Syriza is widely expected to take control. However, whoever governs Greece will be faced with a similar compelling logic. A second debt restructuring will be required to keep Greece within the single currency."
The Greek election provided a sombre backdrop to the gathering of developed and developing nations at the G20 summit in Mexico but the inability of previous summits to resolve the debt crisis meant markets were sceptical about the outcome. Instead, the immediate focus was on whether Madrid would be able to sell up to €5bn (£4bn) of bonds in two debt auctions this week, starting with one on Tuesday.
Markets were left confused by the mixed messages from European capitals, with Berlin first seeming to be willing to grant Greece more time to put its public finances in order then pouring cold water on the idea. Discussions between Athens and its European creditors will begin as soon as a new national unity government is formed.
Ben May, European economist at Capital Economics, said the result in Greece, which left the centre-right New Democracy party with most seats in the new parliament, was the best realistic outcome from an election in which markets had predicted immediate mayhem had victory gone to the anti-austerity Syriza coalition. He added, however, that Greece could still be forced out of the single currency by the end of the year.
"What's more, policymakers will need to take much greater action, perhaps including significant steps towards full fiscal and banking union, to prevent a bigger, more damaging form of break-up."
Neil MacKinnon, a VTB Capital analyst, noted that Greece "remains in a debt trap and the economy is still stuck in a depression." He concluded "ultimately, the scenario of a Greek exit from monetary union remains in place."
Reports from Dublin said that the Irish government, praised by European policymakers for its willingness to adopt tough austerity measures, will get more time to pay back the €85bn it has borrowed from Europe and the IMF. Under the terms of its bailout, Dublin is supposed to clear its debt within 15 years but the likelihood that much of the 17-nation eurozone will soon be back in recession has prompted a rethink that may see Ireland's loan repayment period extended to 30 years.
Oil prices fell sharply on expectation that the eurozone crisis will lead to weaker global demand. A barrel of Brent crude was trading at just over $96 a barrel, more than $30 down on its recent peak in March. Germany's DAX closed 0.3% higher at 6,248.20, France's CAC-40 fell 0.7% to 3,066.19, while the Dow Jones industrial average in New York was down 14 points in afternoon trading. Interest rates on Italy's 10-year bonds rose to just over 6%, prompting a call from the shadow chancellor, Ed Balls, that urgent action was needed to prevent a domino effect across Europe.
Writing in the London Evening Standard, Balls said: "The eurozone must admit that muddling through, patching up bank vulnerabilities, country by country, while sticking to the ideology of austerity has failed and is now building to a catastrophe." Balls said there needed to be a recapitalisation of troubled banks and a role for the European Central Bank as a lender of last resort in order to restore confidence in the financial markets.
"That deep uncertainty is why last week's bailout of Spanish banks has not restored confidence. And it is why, without a proper firewall to stop contagion spreading to other troubled economies such as Spain and Italy, a disorderly Greek exit would be catastrophic not only for Greece but for the rest of Europe and the world economy."
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