PARIS/ROME, (Reuters) – France came under heavy fire on global markets yesterday, reflecting fears that the euro zone’s second biggest economy is being sucked into a spiralling debt crisis.
Global stocks and the euro fell as Italian bond yields climbed back to unsustainable levels on doubts that Italy’s Mario Monti and new Greek leader Lucas Papademos, unelected technocrats without a domestic political base, can impose tough austerity measures and economic reform. European Central Bank President Mario Draghi has predicted the 17-nation currency bloc will be in a mild recession by the end of the year, a view underlined by data showing the economy barely grew in the third quarter and faces a sharp downturn.
“The risks of a technical recession have increased and we expect the economy in Germany to shrink at least in one quarter,” said Michael Schroeder of the German economic research institute ZEW.
On the markets, Italy’s 10-year bond yield rocketed back above 7 percent, pushing its borrowing costs to a level that helped to trigger the fall of Silvio Berlusconi’s government last week and is widely seen as unsustainable in the long term.
Spain’s Treasury paid yields not seen since 1997 to sell 12- and 18-month treasury bills.
French 10-year bond yields have risen around 50 basis points in the last week, pushing the spread over safe haven German bonds to a euro-era high of 173 basis points.
French banks are among the biggest holders of Italy’s 1.8 trillion euro public debt pile.
The urgency of resolving the debt crisis was underscored by a think-tank report saying that triple-A rated France should also be “ringing euro zone alarm bells” as it could not make rapid adjustments to its economy.
Fears are growing in the United States that Europe’s debt crisis is mushrooming into a wider systemic problem.
Alan Krueger, chairman of the White House Council of Economic Advisers, said the European debt crisis was the leading risk to the U.S. recovery.
