Bets against beleaguered Spain and its banks hit an all-time high yesterday amid alarm over the potential impact of Greece pulling of the euro.
The assault on the eurozone struggler came after the ratings agency Moody's cut its credit scores on 16 of the country's banks, citing concerns over their huge exposure to Spain's collapsed property market and Madrid's reduced creditworthiness.
The fresh market jolt sent shares across Europe down again and extended the FTSE 100's losing streak to five days in a row, with taxpayer-backed Royal Bank of Scotland and Lloyds Banking Group the biggest casualties. Worried investors pumped funds into traditional safe havens such as gold and gilts, with 10-year UK bonds hitting fresh record lows.
The cost of insuring against a default by Spain rose to a record high of 5.62 per cent, according to the financial information firm Markit. This means investors looking to protect themselves against Spain going bust have to pay $562,000 (£356,000) a year to insure $10m of the nation's debt. The price of so-called credit default swaps has more than doubled in the past year as contagion fears over Spain grow, Markit's analyst Gavan Nolan said.
Moody's action intensified the fears of contagion in Spain from the turmoil in Athens as markets brace themselves for a potential "Grexit" from the single currency bloc.
The flagging market confidence in Spain also spread to its banks, which also took a hammering in CDS markets as rumours grew that Spain was ready to ban traders from betting against stocks via short-selling. Investors are now being charged 5.05 per cent to insure against a default by BBVA – another record. Spanish banks have been ordered to set aside an extra €30bn (£24bn) to ward off a €300bn exposure to the property sector.