Markets continue downward spiral

GLOBAL STOCK markets continued their downward spiral yesterday as euro zone finance ministers delayed the release of €12 billion in aid to Greece and Italy faced the threat of a ratings cut.

Markets were taken by surprise yesterday morning as investors awoke to the announcement that the €12 billion aid package would not be released until the Greek parliament backed a new austerity plan, despite indications late last week from senior European officials that the deal would be endorsed quickly.

The release of the funds, scheduled to take place in July, depends on the Greek government surviving a vote of confidence today.

European shares fell to a three-month closing low yesterday, as the market continued to look for certainty on the Greek issue.

National benchmark indices fell in every western European market. In Paris the CAC slid 0.6 per cent, while Germany’s DAX index fell 0.2 per cent. The FTSE 100 slipped 0.4 per cent, while in Dublin the Iseq closed down half a per cent lower.

Banking stocks accounted for some of the largest losses amid major concerns about their liquidity and funding positions.

Barclays, BNP Paribas, Lloyds and Royal Bank of Scotland all saw significant falls, though traders noted that volumes across the board were extremely low as uncertainty about Greece pushed investors to the sidelines.

Meanwhile, volatility continued on the bond markets.

The extra yield investors demand to hold Italian debt instead of benchmark German bunds widened after Moody’s said Italy’s credit ratings may be cut.

Ten-year Italian yields climbed three basis points to 4.85 per cent after being as high as 4.88 per cent. The yield jumped to 4.94 per cent at the end of last week, the most since March 11th. The spread between 10-year Italian bonds and German bunds widened to 190 basis points after reaching 204 basis points on Thursday, the most since January 11th.

So-called “peripheral” euro zone nations also saw yields on their medium- and long-term debt increase.

Irish 10-year securities yielded 853 basis points more than bunds, up from 843 basis points on Friday. Portuguese 10-year yields rose 24 basis points to 11.15 per cent, while its 10-year spread over bunds climbed 26 basis points to a euro-era record 821 basis points.

Equivalent-maturity Spanish yields were one basis point higher at 5.58 per cent, leaving the spread over German bunds three basis points wider at 263 basis points.

The euro continued to waver yesterday, down 0.8 per cent against the dollar at one point, though it did regain ground during the day. Brent crude oil fell by 82 cents a barrel to $112.39 a barrel, while US oil lost 30 cents a barrel to $92.71 a barrel.

Meanwhile, authorities in Dublin welcomed the announcement that the European Stability Mechanism, the permanent crisis fund that will replace the European Financial Stability Facility from June 2013, will not have preferred creditor status when it comes to loans to Greece, Ireland and Portugal.

The Department of Finance said the preferred creditor clause had been identified as a “significant impediment and risk factor” by default buyers of Irish bonds.

“The amendment is very good news for Ireland,” Minister for Finance Michael Noonan said.

“The change makes it possible now for Ireland to go back into the markets and be sure that there are people there that will lend us money.” – (Additional reporting:Bloomberg)