European Markets Slide to 1-year Low; Switzerland Cuts Rate to Zero

Devan Biswas
03 Aug, 2011
New York City

European markets extended losses to 10% in ten days as the debt stress resurfaced forcing Italian finance minister in an emergency meeting with the Bank of Italy and the prime minister of Spain to cut his vacation for the second day. Switzerland lowered its key rate to near zero.

[R]4:30 PM Frankfurt – European markets extended losses to 10% in ten days as the debt stress resurfaced forcing Italian finance minister in an emergency meeting with the Bank of Italy officials and Spanish prime minister to cut his vacation for the second day. Switzerland lowered its rate to near zero.[/R]

The European markets extended losses of 10% in ten days and dropped to 11-month low as the prospect of the U.S. sliding into recession and a rating downgrade were compounded by the rising bond yields in Spain and Italy.

The Swiss central bank today cut its interest rate target range to between zero and 0.25% from zero and 0.75%.

The central bank’s move, largely symbolic also indicated that the interest rate is likely to be near zero and is prepared to fight the rise in the Swiss franc.

The last time the central bank intervened in the market was between March 2009 and June 2010.

The euro declined to the lowest against the euro and the yields on the Spanish and Italian bonds hovered near the record high in ten years.

The latest U.S. debt accord will avoid the default crisis but the largest economy in the world is facing a debt rating downgrade and is expected to slide into a recession as early in three quarters.

Bond yields in Europe hovered near the recent highs as bond speculators target Italy and Spain. Italian finance minister held an emergency meeting with the Bank of Italy officials and at least for now sounded optimistic note.

But the bond yields are on the rise as the Italian Prime Minister Silvio Berlusconi is distracted with several legal challenges. Prime minster has yet to make a statement on how the government is planning to deal with the rising costs of borrowing.

Italian bonds the most widely held bonds in Europe after Germany and nearly 90 banks hold more than 325 billion euros of debt, according to the European Banking Authority.

In Spain, situation turned critical and forced Prime Minister Zapatero to cut his vacation for the second day in a row.

Spain is scheduled to raise as much as 3.5 billion euro tomorrow and the yields on 10-year bonds have shot up to 6.21% after rising as high as 6.45% on Tuesday.

In Paris CAC-40 Index fell 54.9 to 1.6% to 3,468.16 and in Frankfurt DAX Index edged lower 173 or 2.5% to 6,624.29.

The benchmark indexes in Stockholm dropped 3.1%, in Athens plunged 5.7% and in Switzerland fell 1.1%. Milan index declined 1.5%.

Gainers & Losers

Banks declined for the third day in a row on the worries that Italy and Spain maybe forced in the arms of the European rescue fund as private markets may demand excessive yields.

The European rescue fund is not large enough to create a secondary market for the Italian and Spanish bonds. Italy and Spain together need to raise at least 400 billion euros for the rest of the year.

Societe Generale dropped 6.3% to 30.29 euros after the French bank reported second quarter net dropped 31% to 747 million euros. The bank earnings declined on the Greek bond downgrade and said it will miss 2012 earnings expectations.

Swiss banks closed higher after the central bank lowered the rate near zero. UBS increased 3% to 12.55 euros and Credit Suisse Group AG gained 2.8% to 27.15 euros.

UPM-Kymmene Oyj dropped 8% to 9.15 euros after the second largest paper maker in Europe estimated second half earnings in line with the results last year.

Lagardere SCA declined 5.7% to 24.10 euros on negative comments from a broker on th rising uncertainties on some of the projects.

Meda AB, the Swedish healthcare company declined 7% to 70.33 euros after second quarter net declined to 381 million kronor from 683 million kronor a year ago quarter.