The threat of a dramatic Greek exit from the euro sent the UK's cost of borrowing falling to an all-time low yesterday as panicky investors dumped shares and risky eurozone debt in a desperate search for safe havens.
Athens faces a deepening political crisis as attempts to form a new government in the wake of last week's inconclusive elections came close to collapse. European stock markets endured a turbulent day with traders bracing themselves for weeks of damaging uncertainty ahead of a likely return to the polls next month.
Open talk of an "amicable divorce" and a "managed exit" for Greece from the eurozone by senior European Central Bank officials, unthinkable just a year ago, fuelled tumbling share prices across the Continent with major share indices in Paris, Frankfurt and Madrid tumbling by up to 3 per cent. London's FTSE 100 fell nearly 2 per cent to 5,465.52, its lowest close of the year.
Victoria Cadman, an economist at Investec, said: "Greece's exit from the euro is being seen as more than just a far-reaching possibility now."
The success of anti-austerity parties in Greece also throws into doubt Athens' commitment to the cuts demanded in return for its latest €130bn (£104bn) bailout. Eurozone finance ministers were expected to deliver a stern message to Greece to stick to austerity or risk losing the funds.
The "Grexit" turmoil sent billions flooding into low-risk assets such as UK government bonds, sending the Coalition's cost of borrowing to a record low of 1.858 per cent at one point. Investors also took shelter in other safe-haven assets with US Treasury yields slipping to 1.78 per cent. Germany's cost of borrowing through ultra-safe Bunds is at just 1.44 per cent. The euro also sank to a four-month low below $1.29 against the dollar.
Michael Hewson, an analyst at CMC Markets, said: "The returns on US and UK debt and German Bunds is well below the rate of inflation, showing that for markets it's now a case of capital preservation rather than capital appreciation. They just want to keep their money safe."