Bond crises ease but fear spreads to Europe stocks

THE FEAR that has gripped Europe's sovereign debt market for months took root in its stock markets as investors increasingly worried on Tuesday about uncertain growth prospects for some of the continent's biggest companies.

Spain and Italy watched their borrowing costs drop further in signs of success for a massive central bank move to quell Europe debt's crisis, but stock markets were in turmoil as stronger economies showed worrying signs of slowing.

Germany's stock market was down for the 10th consecutive day and new data from Europe's growth engine showed that export growth - a closely watched economic indicator - is slowing down.

The Federal Statistical Office said exports in June were up by 3.1 per cent to €88.3 billion (US$126 billion) on the year, the smallest increase in 16 months.

"In June we got to feel the first indications of the decreasing global economic dynamism," said Anton Boerner, the head of Germany's exporters' association.

The impact of the slowing US economy "will be felt in the coming months".

Germany has sailed through the debt crisis relatively unscathed.

Big companies like BMW and Volkswagen reported bumper profits and unemployment is lower than it has been in years.

But if the current stock market sell-off continues, this may soon change. Since July 22, the day after eurozone leaders decided to give their bailout fund new powers but refused to expand its size, Germany's main stock index, the DAX has lost more than 20 per cent.

That's more than the 15 per cent drop seen on the FTSE 100 in the UK, or the 17 per cent dive on the French CAC-40.

Closely watched German indicators of consumer confidence and business confidence also declined more than expected last month.

Minimum growth in france

German output grew by 3.6 per cent last year, and the government in Europe's biggest economy hopes growth this year will again top three per cent.

But in France - Germany's biggest trading partner - growth is likely to only be 0.2 per cent in the third quarter, the central bank said this week.

Though France remains one of Europe's strongest economies, there have been some signs recently that the country may become the next triple A country to be downgraded, especially as the government is unlikely to implement austerity measures ahead of spring elections at a time when the economy is slowing.

One indicator of this possible concern has been the recent rise in the spread between German and French yields to 15-year highs.

The Bank of France' s monthly industrial survey showed both corporate order books and factory-utilisation rates falling for the second month in a row in July.

The benchmark in France recovered from earlier losses and was slightly up in early afternoon trading, but the DAX was 1.4 per cent lower, echoing Monday's plunge on Wall Street, where the Dow Jones fell a dizzying 634 points, one of the worst days since 2008.

In a sign that Germany's politicians are worried, the government called on all members of the eurozone to amend their constitutions "as quickly as possible" to require a balanced budget in a bid to avoid a repeat of the bloc's sovereign debt crisis.

The European Union should also set up a new institution to monitor the member states' competitiveness, keeping budgets and fiscal policies in check, German Vice Chancellor Philipp Roesler said.

Italy recently promised to work for a balanced budget amendment.

Negative sentiment

The negative sentiment on stock markets contrasted with somewhat declining tensions in Spanish and Italian bond markets, where intervention from the European Central Bank was starting to take its effect.

The yield, or interest rate, on Spanish 10-year bonds was at 5.03 per cent, after approaching 6.5 per cent just a week ago.

The yield on Italian equivalents was at 5.14 per cent, also about one percentage point below where it was Monday morning before the ECB intervention.

"It is the worst crisis since World War II and it could have been the worst crisis since World War I if leaders hadn't taken the important decisions," ECB President Jean-Claude Trichet said with French radio station Europe 1, defending the bank's decision to further intervene on bond markets.

Trichet didn't directly confirm that the ECB has been buying up the bonds of Italy and Spain, saying only that his banks "is in the secondary market" for eurozone bonds and that it would release the amounts invested on Monday, as it does every week.

- AP