Eurozone in danger of market meltdown as chaos spreads

THE eurozone is at risk of a financial meltdown on the same scale as the crisis it suffered a decade ago amid surging inflation and aggressive interest rate rises worldwide, City investors have warned.

Bond experts predicted that the European Central Bank (ECB) could have no choice but to follow the Bank of England and step in to prevent market disaster as strains within the bloc’s financial system threaten to hit debt crisis levels within weeks.

Analysts say the eurozone is at risk from the same chaos that struck British markets this week, temporarily sending the pound to a record low and provoking a surge in borrowing costs as swathes of mortgages were pulled by lenders. Investors fear the eurozone could be next amid early signs of building trouble.

Stresses within the region’s financial system have reached levels last seen during the eurozone debt crisis and could soon reach the 2011 peak as traders monitor the region.

An ECB indicator of stress within the eurozone’s financial system – which looks at strains in bond, stock and money markets – has jumped from below 0.1 at the start of the year to almost 0.5 currently, according to Saxo Bank. In the eurozone debt crisis, the index exceeded 0.6.

“If it continues increasing, it could reach in a matter of weeks levels of 2011 – at the peak of the European sovereign debt crisis,” said Christopher Dembik, head of macroeconomic research at Saxo Bank, calling the contagion from the UK “noticeable”.

The main source of strain in the UK has been in the gilt market where bond yields have rocketed and the Bank of England was forced to intervene.

European bond yields have also risen rapidly to hit multi-year highs as problems in UK markets spill over and the ECB acts aggressively to tame inflation

Antoine Bouvet, rates strategist at ING, warned that the Bank of England’s intervention into markets to stem risks in the financial system “sends an ominous sign also to the ECB”.