Eurozone crisis: countries may be 'pushed out' of single currency

Debt crisis intensifies as the Netherlands and France come under pressure from rising cost of borrowing

guardian.co.uk, Katie Allen, Tuesday 15 November 2011

Mark Rutte, the prime minister of the Netherlands, said he would like to
see some countries pushed out of the eurozone. Photograph: Lefteris Pitarakis/AP

The prospect of a eurozone breakup intensified on Tuesday night as borrowing costs around the region soared and the Dutch prime minister said it should be possible to expel some members from the currency union.

Investors are rapidly losing hope that a solution to the sovereign debt crisis will be found, and their fear was demonstrated by rising bond yields – the rate of interest governments have to pay to borrow – across almost all single-currency countries. The Dutch premier, Mark Rutte, stoked fears that a collapse could become a reality as he aired the prospect of countries being ejected, albeit as a last resort.

"We would like countries to be able to be pushed out of the eurozone," Rutte said on a visit to London, adding member countries must "put out the fire" of the debt crisis. As analysts warned of "terror taking hold", even some of those countries until now regarded as safe havens, such as the Netherlands, came under pressure as fears about countries' creditworthiness spread from peripheral countries such as Greece into Europe's core.

One bond expert described this as the most worrying day yet in the crisis. Mike Riddell, manager of M&G's international sovereign bond fund, said France was now suffering a "full-blown run" on its debt, with investors dumping French bonds to move their money to safer havens. Riddell added that the credit default swap (CDS) market – where investors in effect bet on the prospects of countries going bust – now indicates that the chance of France losing its coveted top AAA rating is a near certainty.

"Even the Netherlands, which the market perceives to be the second strongest eurozone sovereign, is coming under a bit of pressure," he said.

France faced fresh criticism over its efforts to contain public debt in a study from the Lisbon Council thinktank for Economic Competitiveness and Social Renewal. The Brussels-based thinktank accused Paris of making little progress on debt and said its economic health was mediocre for a triple-A-rated country.

In Italy, Monday's day of relative calm after Silvio Berlusconi's exit gave way to renewed fears about the country's economic and political future as bond yields climbed back through the 7% mark. That rise came despite the European Central Bank wading into the market to support Italian bonds. The market has little faith that Italy's newly appointed leader, Mario Monti, will be able to push through austerity measures that might get Italy's deficit under control. Italy's borrowing costs climbed amid Monti's apparent struggle to form a cabinet.

Grant Lewis and Emily Nicol at Daiwa Capital Markets described the eurozone crisis as "arguably more precarious than even at the back end of last week".

They added: "In spite of the fall of the Berlusconi government, the incoming PM faces huge challenges, not least in continuing to shrink Italy's deficit against a backdrop of slowing growth."

Italy's growth figures for the third quarter have yet to be released, but the latest update for the eurozone does not bode well. The 17-nation group grew by just 0.2% during the quarter, and many forecasts expect the eurozone economy to contract in the final months of this year.

In Spain, there was more evidence of investors' frayed nerves as the government was forced to pay out its highest borrowing costs in 14 years on new debt. Investors did come forward with enough money, but Spain's borrowing costs shot up to more than 5%, compared with less than 4% at similar recent sales.

Belgium was victim to the same flight from eurozone bonds, and yields on a sale of 12-month debt by Brussels were at a three-month high.

Investors were looking outside the currency union, and Switzerland fared rather differently at its latest debt auction. Its sale of six-month bills had an average interest rate of -0.3%. In other words, investors are paying the Swiss government for the privilege of lending their money to the country.

Louise Cooper, markets analyst at BGC Partners, issued a stark warning to Europe's politicians: "Political leaders beware, this crisis is worsening, and worsening dramatically."

She said the euro's future was in the hands of the German leader: "Merkel, the pressure is rising, momentum is building, now is your moment to prove that you really want to save the euro. Traders and investors are becoming more and more fearful of the outlook for the eurozone, shown by two partially failed government bond auctions, fast rising borrowing costs for euro members and a flight to safety in Switzerland. Terror is stalking the markets and taking hold."

The UK bond market was also one of the few beneficiaries of the heightened panic around the eurozone. The yields on UK government bonds, or gilts, fell – meaning their prices rose – and outperformed German government bonds.

Other countries in Europe but outside the eurozone, such as Sweden and Denmark, have also seen their borrowing costs fall.