Euro notes are pictured coming out of an ATM machine on June 22, 2011 in Athens, Greece.

Story highlights

The euro tumbled to its lowest level in almost two years as investors dumped riskier equities

European stock markets suffered their worst one-day drop in a month

Analyst: "It looks like real panic, but it could get worse ... unless policymakers act decisively"

Financial Times  — 

The euro tumbled to its lowest level in almost two years as investors dumped riskier European equities amid signs that policymakers were bracing for the financial turmoil that could be unleashed by a Greek exit from the eurozone.

The single currency fell about a percentage point during European trading to its weakest level since the summer of 2010 as European leaders gathered in Brussels for an informal summit.

In a sign of how seriously eurozone countries are taking the possibility of a Greek exit from the single currency, it emerged that senior eurozone finance ministry officials had held a conference call on Monday during which each country was asked to detail the contingency planning their treasuries had done to prepare for a Greek departure.

European stock markets suffered their worst one-day drop in a month, while investors fled the riskier sovereign debt of the eurozone’s periphery and piled into haven assets such as the government debt of the US, the UK and Germany.

“It looks like real panic, but it could get worse,” said Christopher Iggo, chief investment officer for fixed income at Axa Investment Managers. “We could see real capitulation unless policymakers act decisively and massively.”

The turmoil pushed Germany’s 30-year bond yield below 2 per cent for the first time, even as the borrowing costs of Europe’s more embattled countries shot up, underlining the severe strains in the continent’s financial system.

The worries about the eurozone triggered sharp falls in oil and commodities markets. Brent crude, the global benchmark, hit its lowest level so far this year, falling to $105 a barrel.

The Bundesbank, Germany’s central bank, said in a firmly worded monthly report that it viewed as unacceptable any relaxation of the terms of Greece’s bailout – as a majority of Greek voters had effectively demanded by backing parties that wanted revisions to those terms. The eurozone could manage the impact of a Greek exit, the Bundesbank said.

Taking an assertive line in Paris ahead of his first EU summit, François Hollande, France’s new president, said he wanted eurozone leaders to discuss the role of the European Central Bank in providing further liquidity to banks and intervening in sovereign debt markets.

The sharp falls in the euro prompted calls that the single currency had finally cracked under the pressure of growing concerns over Greece’s membership in the eurozone.

“Whatever the reasons it has held up so far, the euro does now finally seem to be crumbling,” said Julian Jessop, chief global economist at London-based Capital Economics.

Asset managers and pension funds were on Wednesday cutting their euro exposure and moving into dollars, according to Citigroup. BNY Mellon said that appetite among its clients this week for the US dollar was twice as high as average over the past year.

G249X, German bonds

European importers caught short by the drop in the euro were scrambling to hedge their currency exposure, according to investment banks. The single currency barely moved against the dollar for the first quarter of the year, leading many companies to reduce their normal currency hedging activity.

“People have been caught by surprise,” said Gerald Dannhaeuser, global head of foreign currency sales at Commerzbank. “Companies that need to hedge against a stronger dollar are more concerned now.”

The relative strength of the euro in the face of escalating concerns over the eurozone debt crisis has puzzled companies and investors. The single currency rose 3 per cent against the US dollar in the first quarter of the year. But since the Greek elections on May 6, the euro has lost 4 per cent. By the close of London trading on Wednesday, the euro had fallen one per cent to $1.2544.

Additional reporting by Javier Blas in London