Eurozone crisis reignites as investors lose faith in rescue package

• Spanish and Italian bond yields hit record highs • UK emerges as ‘safe haven’ amid global crisis • Barclays boss backs chancellor’s austerity measures • Italian stock market hits 27-month low The eurozone debt crisis threatened to erupt again on Tuesday as Italy and Spain’s borrowing costs hit record highs, helping to drive Britain’s own borrowing costs down to a record low. The euro also lost ground against most major currencies and the Italian stock market hit a 27-month low, as investors appeared to lose faith in the latest European rescue package . The yield, or interest rate, on Italian 10-year bonds rose to nearly 6.3% at one stage, with the equivalent Spanish bonds yielding almost 6.5% early on Tuesday. If yields reach 7%, a country has effectively lost the support of the international markets. In contrast, UK 10-year gilt yields hit an all-time modern low of 2.76%, amid suggestions that the UK has become a relative safe haven in response to the debt crises raging in both Europe and America. Jane Foley, senior currency strategist at Rabobank, said that Britain’s economic fundamentals are “far from attractive”, but less grim than other countries. “Slow economic growth, low interest rates, a highly indebted consumer sector and a large government fiscal deficit suggest there are clear similarities with the US,” said Foley. “The UK government, however, has proved itself to be better positioned to tackle its deficit demons and although there has been a lack of progress to date on achieving deficit reduction in the UK, at least there is no crisis at present.” Italy under pressure The cost of insuring Portuguese, Italian and Spanish debt also rose sharply on Tuesday, according to data from financial information provider Markit. Although Italy pushed through a four-year austerity plan in July, the scale of the country’s borrowing needs are alarming investors. Last month’s Greek bailout, which will see private creditors take a “haircut” on their loans, has also deterred some fund managers from buying more Italian debt. “We are not convinced that this is the finality of the haircuts,” Johannes Jooste, a senior portfolio strategist at Merrill Lynch Global Wealth Management, told Bloomberg . Representatives from the Italian economy ministry, the Bank of Italy and market authorities are to meet on Tuesday to discuss the market turbulence, Reuters reported. Prime minister Silvio Berlusconi will address Italy’s parliament on the crisis on Wednesday. Italy’s blue-chip share index, the FTSE MIB, fell 1.5% on Tuesday, hitting its lowest level since April 2009. Osborne’s wins Diamond’s approval The record lows for gilts came as Bob Diamond, the American who runs Barclays, endorsed the chancellor’s austerity measures and indicated that the policy was necessary to ensure that Britain retained its AAA debt rating. He also warned that the eurozone would be subject to “chronic event risk”. At a time when the market is expecting the US to be stripped of its top-notch rating, Diamond said it would be “more serious” if the UK were to be downgraded. Market experts reckon that while the US, because of the sheer size of its bond market, might not incur punitive increases in its borrowing cost in the event of a downgrade, the UK would likely endure a sharp rise in bond yields. This would mean the UK would need to pay more to borrow. He said it was “very positive” that the UK was ahead of its rivals in the EU with its cost-cutting measures – some £81bn of cuts are earmarked to take place in four years. “It’s important to support the prime minister and the chancellor,” he said, in the efforts to cut the deficit and cut public spending. Diamond, who was dubbed the “unacceptable face of banking” by Lord Mandelson while Labour was in office, also endorsed efforts by the government to shift the focus for economic growth on to the private sector from the public sector. Recent data shows the UK economy is stalling . The manufacturing sector contracted for the first time in two years in July while UK output grew just 0.2% in the three months to June. European debt crisis Gilts Europe Bonds Bob Diamond Banking Barclays Alex Hawkes Jill Treanor guardian.co.uk

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