PARIS: The interest rate which Germany must pay to borrow money for 10 years fell to the lowest level ever in early trading on Wednesday, reflecting deep concern about the prospect of new Greek elections.
The benchmark German 10-year Bund attracted funds as a haven against strains in the eurozone, with the effect that the interest rate fell to 1.434 percent from 1.469 percent at the close of trading on Tuesday.
The Bund's rate then rose slightly to 1.454 percent, which means that when inflation, which stood at 2.1 percent in Germany last month, is taken into effect, investors earn nothing on money they have invested in German bonds for safe-keeping.
"The market is really worried by the latest developments in Greece," bond strategist Jean-Francois Robin at the Natixis bank commented.
Investors "were hoping for the creation of a government of technicians that could run the country at least temporarily. That will not be the case," he noted.
"New elections are risky because they could confirm the population's support for anti-austerity parties and lead eventually to a eurozone exit" with unknown consequences, Robin said.
Markets have also been unnerved by massive withdrawals of cash from Greek banks, which reached 700 million euros ($888 million) on Tuesday, further weakening the country's fragile banks.
Greek President Carolos Papoulias acknowleged "that there were a lot of fears that could turn into panic."
Against the background of renewed eurozone tension, the rate of borrowing for countries considered most at risk has jumped sharply.
The market rate on Spanish 10-year bonds climbed on Wednesday to 6.495 percent, well above the six-percent level that analysts believe is unsustainable in the long term.
Spain is struggling to support commercial banks which lent massively to the real-estate sector, hit by a slump since 2008.
A Spanish press report said on Wednesday that the international ratings agency Moody's was set to cut the credit ratings on 21 Spanish banks, after slashing the ratings by up to four notches for 26 Italian banks on Monday.
Moody's underscored the vulnerability of Italian banks to recession in the country and to further trouble in the 17-nation eurozone.
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