Euro plunges as Club Med debt fears spread

Fleeting relief over the EU-IMF bail-out for Greece has given way rapidly to a fresh bout of investor panic across southern Europe, pulling the euro down to its lowest level against the dollar in over a year.

By Ambrose Evans-Pritchard, International Business Editor
Published: 9:39PM BST 04 May 2010
Comments 16

Acropolis - Euro plunges as Club Med debt fears spread

Greek Communist Party members wave flags from the Acropolis Photo: AFP/Getty Images

Yields on German two-year debt reached a record low, falling to 0.71pc on safe-haven demand in echoes of credit stress at the height of the financial crisis. This is below the European Central Bank's short-term rate of 1pc. "This is very unusual and indicates concern about systemic risk from sovereign debt," said Stephen Lewis from Monument Securities.

German Chancellor Angela Merkel told ARD television that banks and creditors should be forced to share the pain if further rescues are ever needed, suggesting "an orderly restructuring" of debt in future.

The words were an icy warning to investors that the €110bn (£95bn) aid package for Greece is a one-off case. Banks, insurers, and pension funds with high exposure to Club Med debt cannot count on a second rescue to protect their portfolios if the crisis spreads.

"This is dangerously ill-timed," said Marco Annunziata, of UniCredit. Jacques Cailloux from RBS said a surprise move by the ECB to waive its ratings requirement for Greek debt amounts to monetary easing, saying the bank had moved a step closer its nuclear option of buying eurozone bonds to stabilise debt markets. "Desperate times call for desperate action. The ECB should not wait for a renewed deterioration before acting. Should contagion reappear, there will simply not be enough time. Better to break up the rulebook than to break up the euro area," he said. Signs that the ECB is abandoning its hawkish stance drove the euro down two cents to $1.30.

Hans Redeker, currency chief at BNP Paribas, said the ECB's move on Greek collateral horrified Germans and guarantees their constitutional court will hear a case challenging the rescue. "This is no longer the old Bundesbank. They have bent the rules under political pressure to help one country. Besides, it is causing spillover to other countries,