Debt fears build, with France now in spotlight

INVESTORS yesterday cranked up the pressure on Europe as interest rates on Italian, Spanish and French government debt took another lurch upwards.

Markets remained anxious over the health of several core eurozone countries as yields on ten-year Italian bonds once again crept worrying close towards the “unsustainable” 7 per cent mark. The nervousness came despite former European commissioner Mario Monti forming a new Italian government in Rome.

Although a measure of stability has returned since last week, when fears over Italian debt resurrected talk of a eurozone break-up, investors are still not assured about the ability of 68-year-old Monti to build a government that will steer the country away from financial ruin.

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Doubts over Spain are also mounting after official data yesterday showed that its economy stagnated in the third quarter.

Economists warned that if Italy or Spain were to topple, they could bring down the entire eurozone – as they are deemed too big to fail but also “too big to bail”.

Some believe the even greater worry is France, however, with Fidelity Worldwide Investment yesterday issuing a research note highlighting its various “vulnerabilities”.

“Its economy is slowing, it has the highest debt levels among triple-A eurozone nations and it has significant fiscal work to do on its balance sheet,” the note read. “It also has several large banks exposed to eurozone debts, which appear to be ‘too big to save’.”

Yields on Spanish and French government bonds yesterday rose to 6.35 per cent and 3.63 per cent respectively.

Despite the jitters in the bond markets, however, equity markets largely shrugged off the concerns with the FTSE 100 closing down just 0.2 per cent at 5,509, while France’s Cac-40 closed 0.5 per cent higher. The German Dax closed 0.3 per cent lower.

While eurozone politicians race against time to get government budgets under control, analysts are increasingly looking towards the European Central Bank to buy the 17-country bloc some time by printing money.