PLEBISCITO.EU | PNV. Press News Veneto

Yields on Italian 10-year bonds rocketed to 40 basis points over comparable German Bunds today as the flight to safety gathered pace. The spread had been stable at around the mid 20s for several years until this month.

The scramble to dump riskier bonds hit all the southern European countries, as well as Ireland and Slovenia.

While the markets have not begun to discount a possible break-up of the eurozone, they are clearly pricing in an ominous rift between the Latin and Germanic halves of the monetary system.

The spreads rose to 37 basis points (bp) for Greece, 18bp for Spain, and 14bp for France. Both France and Spain enjoyed spreads as low as 4bp until May, before the global credit bubble began to burst. Italy and Greece both have national debts above 100pc of GDP – far above the 60pc limit set by the Maastricht Treaty.

Belgian spreads have jumped to 22bp, reflecting a “default premium” for the first time as investors begin to discount the possibility that the country will disintegrate.

The bitter battle between the Dutch-speaking Flemish and French-speaking Walloons has left the country without a government for 164 days.

Guy Quaden, the governor of Belgium’s central bank, said the crisis risked getting out of hand. “For the moment it is largely an image problem, but our politicians need to move with care because the economic consequences could prove severe one day,” he said.

Simon Derrick, currency chief at the Bank of New York Mellon, said the spike in yields was the most dramatic since the 9/11 terrorist attacks in September 2001.

“People are asking whether Italian government bonds are really as good as German bonds. The rising euro is starting to expose the strains in the system.”

The euro has reached $1.4850 as Mid-East and Asia central banks and funds switch out of the dollar. The latest balance of payments data shows record portfolio inflows of €46.2bn (£33.3bn) in September.

Professor Peter Bofinger, one of Germany’s five ‘wise men’ advisers, says the euro may soon reach €1.60 unless the EU authorities takes action to stop it, causing major distress for the aerospace and car industries.

ING said the euro’s appreciation has gone far beyond the “painful threshold” of most European firms, with big variations by country. The threshold is $1.20 for French companies, between $1.30 and $1.40 for the Italians and Spanish, and $1.50 for the Germans, Dutch, and Finns.

The bank said France, Italy, Spain had all suffered a serious loss of competitiveness against Germany, which has clawed back share since 2000 by driving down relative wages.

Eurozone industrial orders fell 1.6pc in September, led by drops in chemicals and machinery.

The concern is that the lagged effects of the surging euro are hitting just as the global economy slows and the housing booms in southern Europe deflate. “We have all the ingredients coming together for a very sharp slowdown in euro zone growth next year,” said David Brown, an economist at Bear Stearns.

Marc Ostwald, an economist at Insinger de Beaufort, said the flight to German bonds was linked to the global credit crisis. “There’s a lack of liquidity so people are switching to Bunds, which are heavily traded,” he said.

Mr Ostwald said the spike in Club Med spreads had been offest by a falling bond yields overall, so these countries do not have to pay more to cover their deficits. “The nightmare for Italy is if you get higher spreads and higher yields at the same time,” he said.