UK borrowing costs at all-time low as investors seek 'safe haven'

Spain's deepening economic woes spark panicked flight into British gilts, as new threat looms for Madrid's finances

The UK's cost of borrowing plunged to an all-time low yesterday as panicking investors sought safe havens from the financial firestorm engulfing Spain.

Investors piled into UK gilts as the embattled eurozone member's economic woes deepened and markets panicked over the latest threat to Madrid's creaking finances from struggling regional governments.

Global stock markets tumbled as Spain's cost of borrowing hit a euro-era high of 7.44 per cent – well into the territory which forced Greece, Ireland and Portugal to seek a bailout from the European Union and International Monetary Fund.

In contrast, the UK's cost of borrowing hit a record low 1.4 per cent – well below the current 2.4 per cent rate of inflation – as nervous dealers shunned returns on their cash and simply looked for shelter from the latest storm.

German bunds were in even greater demand as the eurozone powerhouse's benchmark, 10-year borrowing costs sank to 1.15 per cent.

Lloyds Bank Corporate Markets bond analyst Eric Wand said UK gilts had been bolstered in recent days by the prospect of another rate cut from the Bank of England, depending on the success of its Funding for Lending scheme to boost corporate credit.

But he added: "I'd say 70 per cent of what we're seeing is all about Spain and the safe-haven effect. Spain has been trying to get around their funding issues by issuing shorter-term debt this year, but the really worrying thing for them is they're paying so much for it. That can't continue in the medium term. If we carry on like this, it's going to get very messy."

Spain's economy minister, Luis de Guindos, is due in Berlin today for talks with the finance minister Wolfgang Schäuble, fuelling speculation the country is on the way to a full-scale bailout. Spain's stock market crashed more than 4 per cent at one point on a turbulent day for global markets which saw the FTSE 100 close down more than 2 per cent at 5,533.9.

The sell-off in Madrid reached such a pitch that Spain's market watchdog stepped in to ban investors from short-selling. This is where investors borrow stock to sell in the hope of buying it back more cheaply, and banking the difference as profit.

The euro also took a battering as the dollar hit a two-year high of $1.2140 against the single currency.

Spain has already been forced to seek a €100bn (£78bn) bailout for its banks, which have been laid low by disastrous property loans in the boom years. But the latest crisis comes from its regional governments as Murcia looked set to follow Valencia in seeking central government assistance. Spain's regions have been virtually shut out of debt markets and Madrid has been forced to set up an €18bn rescue fund to prop up their finances.

The Bank of Spain piled on the misery as its latest estimates showed a deepening recession for Spain between April and June as the economy shrank by 0.4 per cent. The pain is set to worsen as the prime minister Mariano Rajoy readies an extra €65bn in budget cuts to bring down the deficit in an economy with a jobless rate of 24.6 per cent.

Vincent Forest, an economist at the Economist Intelligence Unit, said: "The economic contraction is now accelerating and will have a significant negative impact on public revenue. In addition, social unrest has begun gathering pace over the past weeks, and could escalate further when the austerity measures begin to bite."

Start your day with The Independent, sign up for daily news emails
ebooksA celebration of British elections
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Editor-in-chief - Financial Services - City, London

£60000 - £70000 per annum + benefits : Ashdown Group: A highly successful, glo...

Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Guru Careers: Management Accountant

£27 - 35k + Bonus + Benefits: Guru Careers: A Management Accountant is needed ...

Guru Careers: Project Manager / Business Analyst

£40-50k + Benefits.: Guru Careers: A Project Manager / Business Analyst is nee...

Day In a Page

General Election 2015: Ed Miliband's unlikely journey from hapless geek to heart-throb

Miliband's unlikely journey from hapless geek to heart-throb

He was meant to be Labour's biggest handicap - but has become almost an asset
General Election 2015: A guide to the smaller parties, from the the National Health Action Party to the Church of the Militant Elvis Party

On the margins

From Militant Elvis to Women's Equality: a guide to the underdogs standing in the election
Amr Darrag: Ex-Muslim Brotherhood minister in exile still believes Egypt's military regime can be replaced with 'moderate' Islamic rule

'This is the battle of young Egypt for the future of our country'

Ex-Muslim Brotherhood minister Amr Darrag still believes the opposition can rid Egypt of its military regime and replace it with 'moderate' Islamic rule, he tells Robert Fisk
Why patients must rely less on doctors: Improving our own health is the 'blockbuster drug of the century'

Why patients must rely less on doctors

Improving our own health is the 'blockbuster drug of the century'
Sarah Lucas is the perfect artist to represent Britain at the Venice Biennale

Flesh in Venice

Sarah Lucas has filled the British pavilion at the Venice Biennale with slinky cats and casts of her female friends' private parts. It makes you proud to be a woman, says Karen Wright
11 best anti-ageing day creams

11 best anti-ageing day creams

Slow down the ageing process with one of these high-performance, hardworking anti-agers
Juventus 2 Real Madrid 1: Five things we learnt, including Iker Casillas is past it and Carlos Tevez remains effective

Juventus vs Real Madrid

Five things we learnt from the Italian's Champions League first leg win over the Spanish giants
Ashes 2015: Test series looks a lost cause for England... whoever takes over as ECB director of cricket

Ashes series looks a lost cause for England...

Whoever takes over as ECB director of cricket, says Stephen Brenkley
Fishing for votes with Nigel Farage: The Ukip leader shows how he can work an audience as he casts his line to the disaffected of Grimsby

Fishing is on Nigel Farage's mind

Ukip leader casts a line to the disaffected
Who is bombing whom in the Middle East? It's amazing they don't all hit each other

Who is bombing whom in the Middle East?

Robert Fisk untangles the countries and factions
China's influence on fashion: At the top of the game both creatively and commercially

China's influence on fashion

At the top of the game both creatively and commercially
Lord O’Donnell: Former cabinet secretary on the election and life away from the levers of power

The man known as GOD has a reputation for getting the job done

Lord O'Donnell's three principles of rule
Rainbow shades: It's all bright on the night

Rainbow shades

It's all bright on the night
'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

Bread from heaven

Dutch survivors thank RAF for World War II drop that saved millions
Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

How 'the Axe' helped Labour

UK will be 'run for the wealthy and powerful' if Tories retain power