French and German Eurozone Woes Rock Markets

French and German eurozone woes rock markets

By Louise Armitstead, Chief business correspondent, Telegraph,  21 Nov 2011

http://www.telegraph.co.uk/finance/financialcrisis/8905428/French-and-German-eurozone-woes-rock-markets.html

Germany and France, Europe’s cornerstone economies, were dragged into the eye of the debt storm on Monday, triggering a collapse of stock prices around the world.

Germany and France, Europe's cornerstone economies, were dragged into the eye of the debt storm on Monday, triggering a collapse of stock prices around the world.

Jose Maria Aznar, the prime minister who led Spain into the euro in 1999, said the European Central Bank (ECB) may have to stand in as lender of last resort “to avoid a disaster”.

The Bundesbank sharply lowered Germany’s growth forecast for next year to 0.5pc – savagely knocking confidence in Berlin’s ability to solve the rapidly intensifying crisis. Meanwhile there were fears that France would succumb to spiralling borrowing costs as Moody’s warned that the country could lose its cherished AAA rating.

A total of £36.2bn was wiped off the UK’s biggest companies on Monday as the FTSE 100 dropped 2.6pc. European markets lost more. The Stoxx Europe 600 index fell 3.2pc; the French CAC and German Dax sank 3.4pc each; Italy’s MIB dropped 4.7pc and Spain’s Ibex fell 3.5pc. US markets also fell, with the deadlock on plans to cut America’s debt driving the declines. The costs of insuring Spanish, Italy and French debt rose.

Investors were shocked by the rapid downward revision of the Bundesbank’s prediction: five months ago, the central bank forecast growth of 1.8pc in 2012. On Monday in its monthly bulletin it said Europe’s powerhouse economy could suffer “pronounced” weakness if the eurozone debt crisis continued.

The International Monetary Fund (IMF) said global growth was “slowing down”. Min Zhu, IMF’s deputy managing director, said: “Last year the world had 5pc GDP growth rates by IMF PPP measures, we forecast this year 4.4pc, with the downgrade in October it became 4pc. And I can tell you even that number becomes too optimistic. If we further adjust that, it can only go down, particularly for the advanced economies.”

Francois Baroin, French finance minister, was quick to defend his nation’s economy, saying current interest rates “correspond to financing conditions which are very favourable”. He pointed to the radical emergency austerity measures undertaken by France and emphasised “one more time, the untouchable objective of reducing the public deficits”.

But rating agency Moody’s said: “A 100 basis points increase in yields roughly equates to an additional €3bn in yearly funding costs. With the government’s forecast for real GDP growth of a mere 1pc in 2012, a higher interest burden will make achieving targeted fiscal deficit reduction more difficult.”

The doubts pounded confidence in Europe’s fragile rescue mechanisms. The ability of the European Financial Stability Facility (EFSF) to raise debt would be seriously damaged if France lost its credit rating. The bail-out fund – designed as Europe’s €1trillion “big bazooka” – has already struggled in the bond markets while leaders deliberate over the funds structure.

In Spain, Mariano Rajoy defied demands from the markets for his government to use its first day to unveil a plan to stave off a bail-out, with his key ally Miguel Arias Canete adding: “We are going to do what needs to be done, but [markets] need to give us space.”

Jose Maria Aznar, the prime minister who led Spain into the euro in 1999, said the European Central Bank (ECB) may have to stand in as lender of last resort “to avoid a disaster”. While the new governments in Greece and Italy struggled to design new austerity packages to meet European demands, contagion spread outside the eurozone.

Hungary officially requested financial help from Europe and IMF. Its currency, the florint, has plunged in value while its credit rating is just one notch above junk.

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