Fear grips markets despite Greek reprieve

Spanish borrowing costs hit record high as early confidence drains away

Spanish and Italian bond yields shot up yesterday as market fears over the future of the eurozone came flooding back, swamping early relief over the weekend's election result in Greece.

Yields for 10-year bonds on debt issued by Madrid surged to their highest levels in the history of the single currency, touching 7.28 per cent, before falling back to 7.16 per cent. Italy's 10-year bond yields also jumped above 6 per cent, ending at 6.09 per cent. Yields above 7 per cent are widely believed to be unsustainable.

The yield spike prompted the Spanish Treasury minister, Cristobal Montoro, to call for capital market intervention from the European Central Bank.

Investors had drawn a sigh of relief at the Greek result, but stressed the underlying crisis had still not been solved.

"While Greek euro exit fears have eased, this outcome does little to alleviate the weak fundamentals that currently weigh on Spain and Italy," Michala Marcussen, of Socit G*rale, said.

Others said European policymakers were still doing too little.

"There is also no sign yet of the collective political will to take the tough decisions required to implement a long-term strategy to resolve the crisis," Mike Turner, the head of Global Strategy & Asset Allocation at Aberdeen Asset Management, said.

European leaders sent out conflicting signals over how they might respond to the latest downward lurch in the eurozone crisis. Ireland's state broadcaster reported that the European Union and the Internatioanl Monetary Fund are considering doubling the repayment term of Dublin's €85bn (£68bn) bailout, from 15 years to 30 years

Yet a suggestion from the German foreign minister, Guido Westerwelle, that Europe is preparing to relax the conditions of Greece's bailout in response to the election result, was swiftly denied.

Mr Westerwelle had told German radio that Greece's political standstill over the past month had inevitably thrown Athens' deficit reduction plans of schedule.

"We are ready to talk about the time frame as we can't ignore the lost weeks" he said.

But government sources in Berlin said the programme would not change. And this was reiterated by the German Chancellor, Angela Merkel, who insisted in Los Cabos Mexico, where G20 leaders are meeting, that there would be no loosening of Greece's reform conditions.

A leaked draft of the Mexico G20 communique, which showed leaders pledging to tackle budget deficits and restore growth failed to lift sentiment in the financial markets. The euro fell to $1.2560.

Asian stock markets had responded positively to the Greek election result, which seemed to raise the chances of the country remaining in the euro.

The Nikkei Index rose by 1.77 per cent and Hong Kong's Hang Seng by 1.01 per cent. But the rally did not continue in Europe, where Spain's Ibex shed 2.96 per cent, Italy's main equity index lost 2.85 per cent and France's CAC fell by 0.8 per cent.

Bank shares were the biggest losers. Spain's Bankia lost 9 per cent of its value, Germany's Commerzbank shed 3.6 per cent and France's BNP lost 3.3 per cent. The UK's Royal Bank of Scotland was down 4.97 per cent.

Commodities markets also fell in response to fears that that the unresolved eurozone crisis will undermine global demand for energy. Brent crude futures fell by $2, having bounced slightly overnight on the Greek result.