Eurozone debt crisis 'shatters' confidence

The eurozone's sovereign debt crisis has severely damaged the fragile confidence in the sustainability of a global economic recovery, the Bank of International Settlements (BIS) warns today, echoing similar concerns from the Bank of England.

BIS, the Basel-based organisation that co-ordinates much of the global banking system, said "fiscal concerns [had] shattered confidence" and prompted a flight to safety by international investors.

"Global financial markets were highly volatile from mid-April to early June as fiscal concerns and the risk of weaker growth caused investor confidence to deteriorate rapidly," the BIS said. "Faced with growing uncertainty, investors cut risk exposures and retreated to traditional safe-haven assets."

The BIS also warned that the rescue package unveiled by the European Union and the International Monetary Fund last month, had provided only temporary reassurance, following widespread fears that many economies could slip back towards recession. The alert from the banking organisation reflects widespread nervousness about the extent to which Europe's leading financial services businesses are exposed to sovereign debt – and how such problems might limit their ability to support the recovery.

The Bank of England's quarterly bulletin, published today, warns that policymakers remain intensely worried about bank lending, though also deeply unsure about exactly what effect the latest stage of the financial crisis is likely to have on the economic recovery in Britain and elsewhere.

Spencer Dale, the Bank's chief economist, said that while the UK had avoided some of the worst problems of previous recessions, particularly much higher levels of unemployment and corporate insolvency, the banking sector's difficulties could prove even more dangerous.

"In particular, companies' access to finance has been constrained, hampering their ability to fund investment spending and raise the working capital necessary for day-to-day operations," Mr Dale said.