Greek deadlock sends markets into fresh spin as default looms

The uncertainty pushed Italian and Spanish borrowing costs higher amid speculation that either country could be the next to plunge into crisis, with JP Morgan saying they could find themselves cut off from access to the bond market if Greece were to exit the single currency.

In London, the sell-off hit banks hardest, with Barclays, Lloyds and Royal Bank of Scotland all on the fallers’ board, down 6.4 per cent, 5.5 per cent and 4.8 per cent respectively.

Other financial institutions fared little better, with Aberdeen Asset Management down 5.6 per cent. Falls among other relatively risky sectors dragged European indices down and wiped £28.5 billion off the value of Britain’s top 100 companies.

The FTSE 100 index of leading shares dropped 2 per cent or 110 points to 5,465.5, its lowest close of the year. Germany’s Dax shed 1.9 per cent, France’s Cac 40 lost 2.3 per cent and Spain’s Ibex 35 Index fell 2.7 per cent.

Michael Hewson, senior analyst at CMC Markets, said: “The continued failure of Greek politicians to agree on the formation of a government, despite dark warnings from all over Europe as to the consequences, has seen investors lose patience and head for the exits, sending European equity markets to multi-week lows.”

Divided over whether to rebel against the terms of their bail-out at the risk of bankruptcy and being booted out of the single currency, Greece’s political parties looked no closer to forming a working coalition more than a week after a general election.

It now looks likely that another election will have to be called for next month, with anti-bail-out parties leading the polls and no working government to enact promised austerity measures in the meantime.

Spain, which on Friday announced further measures to shore up its crumbling banking system against losses from a property crash, saw its ten-year bonds pushed up by a quarter of a percentage point in afternoon trading, to 6.25 per cent.

As the country’s foreign minister issued a desperate call for Greece to come to its senses, ratings agency Fitch said the new rules for Spanish banks would probably lead to further bail-outs and mergers in the sector. It added that an obligation to pass failed loans on to third parties “could trigger a more rapid decline in Spanish property prices”.

The agency said that, while large players such as Santander and BBVA could afford to meet the requirements out of this year’s profits, smaller banks could not.

Fitch said: “These [smaller] banks are likely to look for mergers to give them more time to increase their provisions or will need to seek contingent convertible securities from the state’s fund for orderly bank restructuring.”

Italy’s sovereign debt hit a new record at €1.95 trillion (£1.55tn) but the country still managed to sell €5.25 billion in bonds yesterday, at a cheaper rate than what was available on financial markets. The cost of its debt was still higher as the yield gap with Germany widened.

News that eurozone industrial production fell 0.3 per cent in March and was down 2.2 per cent year-on-year added to the gloom.