London: European shares fell on Thursday, as rising euro zone sovereign bond yields intensified investors’ worries that the currency bloc’s debt crisis would spread further, and that the region is headed for recession.
Spanish bond yields hit 6.98%, their highest level since 1997, at a 10-year auction. A French bond auction also saw high yields.
The spread between French 10-year government bonds and their German equivalents rose to a euro-era high of 200 basis points on fears that the debt crisis engulfing the euro zone is spreading to its larger economies.
Italian 10-year bond yields remained above 7%, even as the European Central Bank tried to stem the crisis by buying bonds. Italian bond yields are at the level reached in Greece, Portugal and Ireland when those countries needed to be bailed out.
France and Italy, the euro zone’s second and third biggest economies, are considered too big to be bailed out, however.
Stocks fell across the board, with the heavyweight banking index among the casualties. France’s BNP Paribas fell 3.6%. The STOXX Europe 600 Banking Index fell 1.6%, and has lost more than 35% in 2011, as banks have taken huge writedowns on exposure to euro zone sovereign debt.
“Bond yields are at unsustainable levels. The ECB’s buying isn’t adequate,” said Richard Batty, strategist at Standard Life Investments, part of the Standard Life Group, which administers £196.8 billion of assets.
“Europe has underperformed other equity markets, driven by the sovereign funding crisis we’re seeing in the region despite the fact that we’ve been promised a policy response. We could be entering a recession in the euro zone.”
Across Europe, France’s CAC40 fell 1.2%, Italy’s FTSE MIB fell 1.2%, and Spain’s IBEX fell 0.8%.
At 03:30 pm, the FTSEurofirst 300 index of top European shares was down 1.1% at 960.26 points.
The euro zone crisis is having an effect on other markets.
Wall Street fell on Wednesday after Fitch Ratings warned that it might reduce its “stable” credit rating outlook for US banks because of contagion from Europe’s woes.
Some strategists said European policymakers would need to make fundamental changes to the nature of the single currency.
“Everyone’s looking around saying we should be doing something, but no one is making any decisions. It can’t carry on like this. But how many weeks have we said that for? Germany needs to lead the way in a euro core, and then think about how we handle the periphery,” said Justin Urquhart Stewart, director at Seven Investment Management.
Political uncertainty is also worrying investors. Governments across Europe are looking to implement austerity programmes to cut debt levels. But changes of ruling parties have had the effect of adding to investors’ nerves.
Italian Prime Minister Mario Monti will outlines austerity measures aimed at restoring confidence in Italy’s strained public finances on Thursday when he goes before the Senate to seek a vote of confidence in his new government.