More red ink as fears of euro breakup grow

Sharemarkets plunged around the world yesterday as European leaders were forced to confront the growing prospect of a break-up of the eurozone.

Panic spread through the financial sector as Italy's bond yields surged past the 7 per cent threshold that prompted Greece, Portugal and Ireland to seek bailouts after Premier Silvio Berlusconi's parliamentary majority unravelled and LCH Clearnet said it would demand additional collateral on Italian debt.

German Finance Minister Wolfgang Schaeuble told lawmakers yesterday Italy might need to consider a request for European Union aid.

In New Zealand, the NZX-50 closed down 1 per cent. The kiwi also fell - down to US77.80c at 5pm from US79.48c on Wednesday.

Japan's Nikkei 225 index fell 2.9 per cent and Hong Kong's Hang Seng dived 4.7 per cent during trading. In Australia the ASX 200 lost 2.4 per cent.

In New York, the Dow Jones industrial average fell 3.2 per cent.

"A prolonged period of 10-year bond yields in excess of 7 per cent alongside a faltering economy is a dangerous mix, and could send Italy's debt dynamics lurching towards an unsustainable and ultimately insolvent position," said Raj Badiani, senior economist at HIS Global Insight.

"However, we continue to argue that Italy remains solvent, and that it can survive several quarters of expensive debt auctions."

Meanwhile power-sharing talks in Greece aimed at avoiding a default on its debts broke down in chaos yesterday. Markets fear a Greek default would lead to huge losses for European banks. That could cause a global lending freeze similar to what happened after Lehman fell in 2008.

In Germany, Chancellor Angela Merkel's Christian Democratic Union indicated it might adopt a motion next week to allow euro members to exit.

A motion that proposes allowing a euro member that does not want to or is unable to comply with the common currency rules to leave the euro without losing membership in the European Union has been accepted by the party for debate at the CDU's annual congress, according to Norbert Barthle, the ranking CDU member of Parliament's budget committee.

"This motion will go through, I am sure of it," Barthle said in Berlin. "Any country that wants to leave the euro on its own should not be prevented from doing so."

Any German move to allow a state to exit the currency area, which is not envisaged under euro rules, would require changes to the bloc's guiding treaty. That can only happen with the backing of Germany's EU partners.

'It will become part of our party platform for future policy with regard to amending the framework treaties of the euro," Barthle said.

It would have to be agreed on by all three parties in Merkel's coalition and may need opposition support in a full parliamentary vote.

- Bloomberg

BLOOD SPILLED
* NZX-50: down 1.0pc
* ASX 200: down 2.4pc
* Nikkei: down 2.9pc
* Dow Jones: down 3.2pc